The views expressed in this letter represent my personal opinion and in no way represent views or positions of my employer, Garden City Community College.
There is a move afoot to change the Consumer Price Index. (AP article: http://www.nbc40.net/story/20259624/new-inflation-gauge-would-cut-benefits-hike-taxes?clienttype=printable and NPR All Things Considered story 12/4). Some contend that economists are in agreement that the CPI overstates the real rise in prices because it does not account for how consumers will substitute a less expensive product for a product that has gone up in price. These individuals argue that a "chained" CPI should be created that takes into account how we substitute products when prices rise.
Why is this important? Because the CPI is used to compute the cost of living increase for Social Security benefits for one. They argue that the current CPI overstates the increase in the cost of living because it doesn't account for this substitution effect. In other words, reading between the lines, we are spending too much on Social Security cost of living increases.
As an economist I absolutely disagree with this logic. The reason we have a CPI is to determine the impact changing prices have on our standard of living. While the general selection of goods and services we can purchase with our given income is a significant portion of this concept, so too are the specific goods and services that we have chosen to buy with a specific income. If we are forced to buy a 1,000-square-foot house because the price of a 1,200-square-foot house rose, is not our standard of living less than it was before? "Chaining" the CPI to factor in these substitutions entirely masks the degradation of a standard of living as a result of these substitutions. "Chaining" the CPI would only codify a declining standard of living over time.
Further, should cost of living adjustments be based on a "chained" CPI, the additional income received from the cost of living adjustment does not allow you to continue to purchase the original products you want. A "chained" index understates the actual increases in those prices, and therefore, any resulting cost of living adjustment still leaves you unable to purchase the original products you desired.
For anyone that wants to examine the current CPI directly, navigate to: http://www.bls.gov/cpi/#tables. (You will see that food, fuel and housing are still part of the CPI). The CPI is compiled and published by Bureau of Labor Statistics, U.S. Department of Labor.
No doubt, we are all concerned about the federal deficit and the level of spending in Washington. But using a disingenuous means to "re-define inflation" and reduce federal spending through lower Social Security cost of living adjustments to address these concerns is simply, squarely, misplaced.
Marcy is instructor of economics in the Social Sciences Division at Garden City Community College.