Price Index
One of the most important statistical measures of price inflation is the Consumer Price Index, produced by the Bureau of Labor Statistics. Although this is often called a "cost-of-living index, that's not really correct. In the words of a Bureau of Labor Statistics researcher, "Economists have noted for decades that the U.S. Consumer Price Index (CPI) may tend to overstate changes in the cost of living. But bias in the CPI became an important policy issue only recently, ..."
In 1996, the movement to find a better measurement of the "cost of living" gained momentum, in part because the Consumer Price Index is used to set increases in Social Security benefits, to revise income tax brackets, and for similar purposes. If it could be replaced by a more accurate "cost of living" measure, and if the more accurate measure were to increase less rapidly, then the growth of the government deficit would also be slower, even without any other changes in the law and the budget.
In December, 1996, a distinguished commission of economists under the chairmanship of Michael Boskin reported on its study of the issue, finding that the Consumer Price Index had overstated inflation in recent years by about 1.1% per year. Many of the points made by the Boskin Commission had been also mentioned in a briefing by the Bureau of Labor Statistics. Everyone agrees that the Consumer Price Index has some shortcomings as a measure of the "cost of living." But there is still some controversy about just how far off it is, and what to do about it.
In the next few pages, we will review the way the CPI is computed and what it means to speak of a "cost of living index," and summarize the recent discussions of the Consumer Price Index and its advantages and disadvantages.
Price Index
Copyright