Adjusting the Consumer Price Index
by Gary Robbins, Aldona Robbins on 12/01/1997
22 Pages
Synopsis:
Each month investors anxiously await the latest Consumer Price Index (CPI). But the CPI is of importance to far more than investors. Over 30 percent of federal spending and 57 percent of mandatory federal spending is adjusted using the CPI. Key amounts of the tax code are also indexed to the CPI, including the personal exemption, standard deduction, and income brackets. Talks are underway about changing the way the CPI is computed, because it is believed that the current CPI index overstates inflation by as much as 1.1 percentage points. But if the CPI is lowered, it will result in reduced entitlement benefits but higher tax receipts to the federal goverment. Because of this "moral hazard," it is important that the CPI not be adjusted to suit political purposes, but rather to better reflect reality. This Policy Report explores the method and problems behind the CPI, and suggests remedies.
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