The True Rise in Cost of Living

For more than eight decades, some of the smartest people in the economics business have worked on index-number theory.  The basic issue is how to measure price inflation.  A few years ago the government (Bureau of Labor Statistics) started publishing measures (chain-weighted price indexes) that no longer fail to account for consumers constantly shifting the bundle of goods they buy toward those whose prices are rising less rapidly, as the standard CPI does.  Consumers do substitute when relative prices change, and the new measures recognize this.

This issue is technical, but it has become crucial in the “fiscal cliff” discussion.  Republicans wish to use the new measure to index (link to inflation) benefits of transfer programs, particularly Social Security (OASDI).  Liberals don’t like this — it will slow growth of incomes among Social Security recipients (me included).  I hate to say it, but the Republicans have it right on this one: using a chain-weighted price index better reflects the true rise in the cost of living.  If we are indexing benefits, as we have now for many years, it should be done properly.  And here’s a case where economic theory, coupled with careful applied research by a government agency, has produced the right answer.  It’s time to use it.

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  1. D says:

    How about we actually study the cost of living changes on the people we are looking to apply it to?
    http://www.cepr.net/index.php/blogs/cepr-blog/thoughts-on-the-chained-cpi-social-security-and-the-budget

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  2. Tom says:

    Why do you “hate to say it”?

    Well-loved. Like or Dislike: Thumb up 10 Thumb down 2
  3. mike5790 says:

    Most of these comments about “baskets” and equivalent living make no sense. Those that paid into the entitlement programs did that when the cost of living was X and thus, those receiving benefits could receive X. Regardless of what shell game you play with account titles, essentially the entitlements are a pay-as-you-go program with money coming in and going out. If the people funding the programs then, because of inflation or other cost of living reason are all living in hovels you danged well better not expect them to pay payroll et al. taxes to keep you in your suburban craftsman. If in fact, for example, population densities cause the net size of a home to decrease, land-size, etc., you DO NOT get to live in your static world. That is neither fair nor pragmatic. Economically unsustainable draws on the economy (by definition you are no longer productively contributing to the economy because the money you spend isn’t novel, it’s taken FROM the GDP) Eat your doggone chicken. Besides, shouldn’t we all be eating Kangaroo?

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  4. Allen says:

    The only true measure of inflation is the number of hours the minimum (or lowest paid workers) have to work to buy their necessities compared to how many hours they had to work in the baseline period. As a kid, my dad taught me to look at the cost of housing (rents and selling prices) against wages when we visited new towns. If the jobs are low wage and housing prices high you had a contracting or sick local economy and if the jobs were high wage and housing low you had an expanding or health local economy. After over 50 years of following those number I have found them as a reliable guide to economic health.

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    • James says:

      “If the jobs are low wage and housing prices high you had a contracting or sick local economy…”

      Aspen, Jackson Hole, Taos, Tahoe…

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  5. Mark Anthony says:

    Wouldn’t the “chained” index actually mask the true cost of living increase? The substitution of cheaper goods for more expensive goods is obvious as the cost of living rises, but is that not part of what needs to be measured in the cost of living? Substituting hamburger for steak is one example, but as the cost of living rises, that rise is lost as one then substitutes chicken for hamburger, then rice and beans for the chicken, and then finally cat food for the rice and beans. All the while “chain indexed” to show an artificially low rate of inflation and negligible increases in what it actually costs to live.

    To have a useful method of measuring cost of living and inflation I believe we need a fixed basket of goods, without chaining or “ex” gasoline or “ex” food or “ex” anything else. That volatility needs to be included if you’re going to be accurate.

    In the end all “chaining” is just an academics method of massaging the data to get the numbers politicians want to see.

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    • James says:

      “…and then finally cat food for the rice and beans.”

      Suggest you visit your local grocery store, and check the cost of (canned) cat food vs rice & beans, hamburger, etc. Or to check on-line, the first hit on “canned cat food” works out to $6.22/lb (24 3-oz cans). If older folks are eating cat food, I suspect it’s because of deteriorating taste buds rather than to save money.

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  6. Voice of Reason says:

    Despite Social Security starting as a Ponzi Scheme, it was managable because it was a safety net for those who were too old to work and needed money for survival. It’s going broke now because middle aged people see it as a way to retire early, and spend their golden years playing golf and sitting on the beach. If they wanted that life, they should have saved for it. This system will only work for its benefits are given out to those who are too old to work or save. Then it can work as insurance for “living too long.”

    I’d say take the average life expectancy, subtract 3-4 years, and use that number for when benefits start.

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  7. Donovan Moore says:

    WRONG! Food, which makes up a very large portion of the average American’s budget is WAY Under reported. How? Food companies have resorted to giving you less and using smaller sizes yet charging you the same price. THIS IS INFLATION THAT IS NOT REPORTED. We know this, too bad you can’t figure this out Dan.

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