Is the Consumer Price Index a Fair Measure of Inflation?

Abstract

The Consumer Price Index (CPI) is widely used to adjust wages and federal benefits as an offset to inflation, but the index contains substantial sources of bias as used for such purposes. For instance, these sources of bias, such as changes in the real cost of petroleum, the cost of environmental protection, and an inappropriate method for measuring homeownership costs, accounted for nearly half of the CPI increase in the year from November 1978 to November 1979. Because of the nature of the index, such biases will always be present, creating the risk that the CPI may be adding to the inflation that it is only supposed to measure. Therefore, a new index or indexes that are more appropriate for adjusting wages and benefits for inflation should be developed.

Setting and Firing Policy Triggers

“…It has been a very durable trigger mechanism despite -and perhaps because of-the fact that it too has important flaws which caused it to seriously overmeasure inflation in the 1970s. (On flaws in the Consumer Price Index, see for example Cagan and Moore, 1981;Wahl, 1982;Jencks, 1987;Dougherty and Van Order, 1982). It might be expected that the flaws in the Consumer Price Index would lead to pressure from technical experts and users (mostly economists) to revise it: the time-series is now virtually useless as an accurate measure of inflation, and the CPI is never revised retrospectively, unlike most other government statistics.…”

The Outlook for Social Security in the Wake of the 1983 Amendments

“…Throughout this analysis we use the consumer price index (CPI) as our indicator of price changes. Wahl (1982) and Kahn (1982) recently have debated the use of the consumer price index as a measure of inflation. It is generally agreed that changes in the CPI have tended to overstate the rate of inflation in the United States.…”