What Chained CPI Means
It's a subtle way to cut spending and raise taxes. Fair? Depends on whom you ask.



What kind of economic metric can be called “a moral and economic disaster,” “unconscionable,” and “a fraudulent premise”? A chained Consumer Price Index for all urban consumers —“chained CPI,” for short (C-CPI-U, if we’re really being austere). Applying this measure across the U.S. government’s tax and spending policies would apparently be a crime against humanity.

And yet it’s been a popular entitlement-reform proposal from conservatives for many years now, was a feature of the Simpson-Bowles and Domenici-Rivlin bipartisan deficit-reduction plans, and has now been included, with a couple of tweaks, in President Obama’s 2014 budget proposal.

What is the difference between chained CPI and the status quo? Chained CPI, most simply, is a lower estimate of inflation, and probably a more accurate measure of how much the cost of living increases each year. It can have big consequences for the federal budget.

Currently, the government uses two main indexes of inflation from the Bureau of Labor Statistics (BLS): CPI-W, the original inflation measure, and CPI-U, a measure that considers a wider sample of consumers. But they’re pretty much the same thing. Both measure, each month, the combined price changes of a certain “basket” of goods and services. Privately gathered data tend to track the BLS’s numbers quite closely.

But the composition of these baskets is comprehensively revised only about every decade, and choices within spending categories, such as food or transportation, aren’t adjusted when prices on certain items in those categories change. The classic example is that if the basket includes spending $50 on beef per month, and the price of beef doubles, the CPI-U and CPI-W will show that the cost of living has increased by $50. Actual consumers are likely to buy more of another meat product, or different foods altogether, reducing the cost-of-living increase or eliminating it entirely.

Chained CPI is a way of constantly adjusting the existing baskets of goods to take these choices into account. The term “chained” refers to the fact that each “link” in the “chain” involves new weighting of the data, rather than being based on the original assumptions of the index. A chained price index suggests that the cost of living is growing slightly more slowly than official government calculations hold, and the BLS itself explains that the traditional Consumer Price Index is “an upper bound” to actual cost-of-living increases — even though it’s what the Social Security Administration currently uses to calculate cost-of-living increases.

Since the BLS started publishing a chained CPI in 2000, these inflation estimates have been on average 0.3 percentage points, or 30 basis points, lower than the rates calculated using the standard measures.

Replacing the federal government’s inflation indexes with chained CPI would do two main things: First, it would reduce the rate of growth in a given senior citizen’s Social Security benefits each year by 0.2 or 0.3 percentage points. Spending would be reduced on some other inflation-tied programs, too. Second, each year, several hundred dollars of each American’s income would slip into a higher tax bracket, as the thresholds would be raised more slowly than they would be otherwise. This would raise Americans’ taxes very slowly over time, resulting in, ten years from now, most people’s paying about 0.2 or 0.3 percent more of their incomes in taxes, or a little over $100 a year for those making under $100,000 (more in dollars, but smaller percentage increases, for those above).