NCPA - National Center for Policy Analysis

Price Index Fix Moves Growth Rate Up, Inflation Down

October 6, 1997

What is the latest in the debate over the vagaries of the Consumer Price Index? That recently maligned measurement is undergoing analysis to cure it of its suspected habit of overstating the price of everything.

  • Since the start of 1995, Labor Department statisticians have modified the treatment of rents, hospital prices and generic drugs -- as well as altering sampling methods for food and nonfood items.
  • These and other changes have reportedly cumulatively lowered the current rate of consumer inflation by 0.2 to 0.3 of a percentage point.
  • The process is to continue through 1999 as the government updates the weighting of items in the composite, changes the treatment of computers and makes other modifications.
  • Experts say the reported rate of inflation in 1999 should be about three-quarters of a point below what the old 1994 yardstick would have registered -- perhaps more.

But since the government is not going back and fixing the past data, the effect is to bias inflation downward, experts warn. This may help explain why growth currently seems high and inflation low, they point out.

Source: Gene Koretz, "A Price Index Gets a Quiet Fix," Business Week, October 6, 1997.

 

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