Congress is considering an alternative inflation measure as part of its deficit reduction initiatives.
The alternative inflation measure is known as the chained consumer price index or chained CPI. The chained CPI includes an adjustment mechanism that presumably accounts for consumers switching to substitute goods and services when a similar category of goods or services experiences rapid price increases.
The overall result of this adjustment for substitutes is a price index that that increases at a slower pace than other price indexes such as the CPI-W or CPI-U.
Analysts estimate that deficit reduction totals and potential government “savings” could reach as much as $500 billion over the course of a decade.
Critics argue that any deficit reduction results produced by adoption of the chained CPI would be largely at the expense of retirees.
The basis for this criticism is the relationship between a consumer price index and cost of living adjustments (“COLA”).
Entitlement programs such as Social Security and are indexed to inflation. In other words, the payments that beneficiaries receive from Social Security increase when inflation increases.
Currently, the Social Security cost of living adjustments are pegged to the CPI-W.
It could be argued that retirees are short-changed by this current arrangement with the CPI-W, since there are alternative indexes such as the CPI-E that provide an inflation gauge more relevant to the elderly.
The chained CPI is actually a step in the opposite direction, as the inflation measure and therefore cost of living increases would actually be one quarter of one percent per year less than the CPI-W.
Sources: Washington Post and NPR
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