NCPA - National Center for Policy Analysis

Better Than Nothing: Cautiously Trying Out A New CPI

April 11, 1997

The U.S. Bureau of Labor Statistics will start experimenting with a new formula to calculate the rate of inflation. The new consumer price index would reduce the reported inflation rate by as much as a quarter of a percentage point.

This is considerably less than the 1.1 points of overstatement estimated by a panel of economists appointed by Congress last year.

  • The experimental formula -- which isn't likely to be adopted before 1999 -- attempts to improve accounting for consumers' inclination to adjust their purchases when prices change.
  • If the index rose a quarter of a percentage point a year earlier than currently projected, the federal budget deficit would be about $13 billion smaller in 2002, the Congressional Budget Office estimates.
  • By 2007 the federal deficit would be $35 billion smaller than otherwise.
  • From December 1990 through February 1997, inflation rose 18.6 percent under the current formula -- but only 16.2 percent under the revised formula.

The new formula would apply only to changes within product groups -- such as substituting one kind of lettuce for another if the price of the first kind goes up. It would not address wider substitutions -- such as buying more chicken when beef prices rise. Nor would it take into account such consumer decisions as to whether to patronize discount stores rather than department stores.

Source: Jacob M. Schlesinger, "Labor Bureau Unveils Experimental CPI," Wall Street Journal, April 11, 1997.


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