Lawmakers are considering changing how the Consumer Price Index is calculated, a move that could save perhaps $220 billion and represent significant progress in the ongoing federal debt ceiling and deficit reduction talks.
According to congressional aides familiar with the discussions, the proposal would shift how the Consumer Price Index is calculated to reflect how people tend to change spending patterns when prices increase. For example, consumers tend to drive less when gas prices increase dramatically.
Such a move is widely seen by economists as resulting in a slower rise in inflation. That would impact an array of federal programs that are linked to CPI including the Social Security program and income tax brackets set by the federal government.
The proposal could lower federal spending by around $220 billion over the next decade, based on calculations by last year's White House deficit commission, which recommended the change as part of its final report.
According to two congressional aides familiar with the budget negotiations, the shift is being "seriously discussed" as part of the ongoing talks to strike a budget deal, that would be used to ease the passage of a required increase in the country's debt limit.
Got that? Rather than addressing the problem like adults, Congress is trying to fool the public by saying the inflation rate is lower than it is, so they don't have to pay out as many entitlements. I'm with them on reducing entitlement expenses to help get the deficit under control. What I find despicable is trying to change the definition of price inflation. Sadly, this isn't the first time this has been done for political expediency.
A little background if you're not familiar with the joke that is the Consumer Price Index. You'd think an inflation measurement would simply take a basket of goods and compare the price of that basket year-over-year. That's how it used to work. Then to address growing budget deficits in the 1980's and 1990's , Washington decided to manipulate implement changes to the CPI.
First, they decided to subjectively measure the quality of goods. For instance, if your laptop cost $1,000 last year and $1,000 this year, but the memory increased, the CPI would count that as a drop in the price of the computer. That intuitively makes some sense, you're getting more for the same amount of money. The problem is that's a subjective measurement made by people with an incentive to keep prices low.
The second and much bigger problem is they introduced Substitution. This methodology says that if the price of filet mignon goes up by 25% that shouldn't be counted as a price increase because consumers will switch to cheaper meats like sirloin or T-Bone or whatever. Seriously, that's really what they do.
The other issue with CPI is the basket doesn't necessarily reflect what's going up in price. For instance, did you know that during the massive run-up in home prices none of that was captured in CPI? Rather than using home prices, the CPI tracks something called owner-equivalent rent. So what's been happening recently is the Fed prints endless sums of money and it's going into assets that are not being tracked by the CPI, so it makes it look like the Fed money printing isn't causing any problems.
The last part of this ruse is that the CPI is used to calculate the GDP growth rate. GDP is (stupidly) used as an indicator of economic growth by the media, government, public and investors. The CPI is used to deflate GDP, so a lower CPI causes a higher GDP growth rate and vice versa. The whole thing is perverse and it's why I publish the Reinwasser Middle-Class Index - to get a true gauge of the economic health of the average family.
Tags: "are government statistics accurate" "how is the cpi calculated?" "government lies" "inflation rate" cpi "gdp growth rate" gdp "middle-class index" "shadow stats" "true inflation rate" "does the fed cause inflation?" "change in cpi"