Budgetary and Distributional Effects of Adopting the Chained CPI

Summary

This report examines the budgetary and distributional effects of using what is referred to as the Chained Consumer Price Index (C-CPI-U or chained CPI) as the official measure of inflation for adjusting federal revenue and spending programs for inflation.

Several other variations of the Consumer Price Index (CPI) are currently used to make automatic adjustments that affect both outlays and revenues. For example, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the basis for adjusting Social Security benefits, while the Consumer Price Index for All Urban Consumers (CPI-U) is the basis for adjusting personal income tax parameters to keep up with inflation.

Concerns over the ability of the Consumer Price Index (CPI) to accurately measure changes in the cost of living are long-standing. At issue then, as now, is a concern that the CPI does not accurately measure changes in the cost of living. In this respect, there is a broad consensus that the chained CPI is a more accurate measure of inflation than those currently in use. Further, if adopting the chained CPI is done for technical reasons, a case can be made that the chained CPI should be used in all cases the federal government attempts to mitigate the effects of inflation.

In spite of concerns about the accuracy of the CPI and a consensus that the chained CPI is a more accurate measure of inflation, there are no current legislative proposals to adopt the chained CPI outside of more comprehensive entitlement, budget, or tax reforms, such as the Tax Reform Act of 2014. This observation suggests that interest in adopting the chained CPI may have less to do with improving the technical accuracy of the measure of inflation and more to do with budgetary considerations. In particular, the chained CPI has and would be expected to continue to deliver lower estimates of inflation. This would, in turn, reduce the rate of increase in several mandatory spending programs.

The associated deficit reduction from adopting the chained CPI has been noted for some time. For example, the Advisory Commission to Study the Consumer Price Index (often referred to as the Boskin Commission) concluded that adopting the chained CPI would reduce the debt $691 billion between 1996 and 2006. This deficit reduction would be realized in the form of lower federal spending and increased federal tax revenue and was politically unpopular in 1996 at the release of the Boskin Commission Report.