Adopting a technical fix for measuring inflation could save upwards of $200 billion over a decade
By Loren Adler and Shai Akabas
The U.S. government currently loses tens of billions of dollars each year by inaccurately measuring inflation. There is a relatively simple fix, yet its inclusion in the fiscal cliff negotiations is generating significant ire from some in the blogosphere, including Ezra Klein.
First, a brief crash course to explain what the “chained-CPI” is, why the Bureau of Labor Statistics (BLS) believes that it more accurately captures the rate of inflation, and why this matters for the federal budget. (For a more-detailed explanation, see this good primer from the Moment of Truth.)
Cost of Living Adjustments (COLAs) for many federal benefit programs, tax brackets, and other thresholds are indexed to versions of the Consumer Price Index (CPI), which measures price changes in a market basket of goods. Maintaining purchasing power by accounting for inflation is essential for all of these government functions, but the current CPI metric does so inaccurately. BLS has found that current calculations of the CPI overstate inflation (e.g., when the prices a consumer faces rise by 2 percent, the CPI measures roughly a 2.3 percent increase). When this happens year after year, the error is compounded.