NCPA - National Center for Policy Analysis

Price Index Revisions Are Having Effects

May 4, 1998

Beginning in 1995, officials at the Bureau of Labor Statistics began revising the standards which measure inflation in the consumer price index. The effect has been to lower the perceived rate of inflation.
  • Growth in the CPI is now running at 1.4 percent -- one-half point below what it would have registered prior to the revisions.
  • Since February, the BLS has made further adjustments, giving less weight to items that Americans are using less and adding weight to those that have gained popularity -- shaving an additional two-tenths of a point off the final figure.
  • Other revisions due to take effect next January are expected to clip yet another two-tenths of a point off the index.

Some economists say the restated CPI will intensify pressure on companies to improve productivity rather than raise prices -- with a net effect of boosting growth by a tenth of a percentage point.

The adjustments will also affect labor union contracts whose pay provisions are tied to the index, as well as reducing cost of living adjustments for those on Social Security.

The lower CPI should increase the anticipated federal budget surplus next year by $4 billion to $5 billion. By 2004, the BLS moves could be worth $51 billion in budget savings, according to the Congressional Budget Office. Some $15 billion of that would come from slower increases in the standard deduction on income taxes, $10 billion in savings in federal pension payouts and in the earned income credit and $26 billion in lowered Social Security payouts.

Source: Dean Foust, "Alan Greenspan Meets Granny Smith," Business Week, May 4, 1998.


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