NCPA - National Center for Policy Analysis

Replacing The Consumer Price Index

April 10, 1996

Some economists and politicians are advocating replacing the Consumer Price Index, as a measure of inflation, with a more accurate measurement known as the "chain-weighted GDP price index."
  • Most experts agree that the CPI -- used to calculate everything from Social Security cost-of-living increases to income tax brackets -- overstates inflation anywhere from 0.7 percent to 2.2 percent.
  • Such a maladjustment only compounds the financial insecurities of Social Security and Medicare, resulting in vastly increased federal deficits.
  • The discredited CPI overstates inflation because it does not take into account constantly changing buying patterns in the U.S. economy -- a defect not present in the GDP index.

Both the Congressional Budget Office and the administration's Office of Management and Budget already agree that the GDP measure more accurately reflects inflationary trends, since it takes into account all cost-of-living components.

The GDP indicator is already used to adjust discretionary appropriations caps in the budget. If this simple technical substitution were applied to all programs, a large number of differences between congressional and White House budget negotiators would presumably vanish.

Experts estimate that the chain-weighted GDP price index has averaged close to 0.4 percent less than the CPI in recent years. So shifting to the former would remove more than $75 billion from the deficit over the next six years before we had to worry about "cutting" a penny.

Source: Sen. Alan K. Simpson (R-Wyoming), "The Best Way to Measure Inflation," Washington Post, April 10, 1996.

 

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