NCPA - National Center for Policy Analysis

Quest For The Real Inflation Rate

December 27, 2001

In 1997 a commission charged with determining the accuracy of the Consumer Price Index concluded that it may be overstating inflation by 1.1 percent or more annually. The question is significant, because Social Security benefits, federal income-tax brackets and countless wage contracts are tied to inflation.

The main contention of the Boskin commission report -- named after its chairman, Stanford economist Michael Boskin -- was that the Labor Department's statistical experts did not fully take into account the improved quality of many products whose prices were used to measure inflation.

Now a new study, undertaken by a panel of 13 economists headed by Charles Schultze of the Brookings Institution, says that such estimates are difficult to make and easy to exaggerate -- and finds many holes in the Boskin analysis.

  • In some cases, the Schultze panel contends, the Bureau of Labor Statistics is likely to over-adjust for quality -- which means that official inflation figures are too low, not too high.
  • Moreover, the Boskin group may have overstated quality in some critical areas, such as automobiles, housing and medical care.
  • The Schultze group also cited the inherent difficulty of taking into account the benefits to consumer well being of new products.

The panel recommends a conditional cost of living index that is relatively unambiguous, including quality adjustments but leaving out such elusive factors as traffic congestion, environmental degradation and consumer expectations.

However, it makes no precise estimates of whether the CPI overstates or understands the true rate of inflation.

Source: Jeff Madrick (Challenge Magazine), "Economic Scene: A New Study Questions How Much Anyone Really Knows About the Real Rate of Inflation in the U.S.," New York Times, December 27, 2001.

 

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