NCPA - National Center for Policy Analysis

Index Still Overstates Inflation

March 1, 2000

More than three years ago, a group of prominent economists estimated that the Consumer Price Index probably overstates inflation by about 1.1 percentage points a year. Although adjustments have been made in the index since then in an attempt to rectify the problem, they now say it continues to overstate inflation by 0.8 percentage points.

Their estimate is contained in a report prepared by the General Accounting Office at the behest of Sen. Daniel Patrick Moynihan (D-N.Y.), for release today.

  • Even modest reductions in any upward bias could result in smaller wage increases for some workers and smaller Social Security cost-of-living increases.
  • Moynihan claims that reducing the cost-of-living increases by eight-tenths of a percentage point would eliminate more than half of Social Security's projected shortfall over the next 75 years.
  • One reason the index overstates inflation is that it is unable to fully capture decisions by consumers to switch from one variety or type of product to another when prices rise.
  • Also, popular new products -- such as computers and cell phones -- aren't being incorporated into the index soon enough to capture subsequent declines in their prices.

Finally, there is the problem of accounting for improvements in the quality of products, the economists reported.

Source: Richard W. Stevenson, "Economists Readjust Estimates of Overstatement of Inflation," New York Times, March 1, 2000.

 

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