One way to fight inflation: revamp US price index
The federal government's monthly consumer price index (CPI), chief measuring stick of inflation, is under strong attack in Washington as a major factor in pushing up the inflation rate. Billions of dollars in government and private expenditures are involved.
Speaking at a Conference Board luncheon in New York recently, Elmer B. Staats , United States Comptroller General, expressed official concern about the CPI. The key indicator is "not a very good indicator now," he says, because too much is tied to its movement.
"It is time to take a look at the whole indexation issue," Mr. Staats asserts.
Acknowledging that indexation linked to the CPI is "a politically sensitive issue" largely because of cost-of-living adjustment provisions in union contracts, he concedes that revisions would be difficult. But he and many other economists in and out of government argue that the CPI must be revised if inflation is to be curbed.
Organized labor disagrees. The AFL-CIO contends that the Carter administration should put more energy into finding solutions to the real problems of inflation and less into trying to reshape the CPI.
In efforts to keep income in line with costs, the wages and salaries of some 6 million American workers now are tied to the CPI, usually with quarterly adjustments in pay based on the upward movement of the index. Many get increases that fully offset the rise in the CPI.
Social security benefits also are adjusted annually on the basis of the CPI to keep the income of the retired as even as possible with the rise of living costs. This July, benefits may go up as much as 12 percent to offset the inflation over the past year.
Benefits of retired government employees and military personnel also increase with the CPI, as do food stamp allotments and welfare payments to millions of persons.
The impact is obviously heavy: By conservative estimates, every 1 percent increase in the CPI triggers more than $1 billion of raises in pay and benefits. Beyond that, rises in the index can be reflected in rents, insurance costs, child-care payments, and other costs.
Critics complain that the increases triggered by rises in the CPI automatically mean that further rises in the index are inevitable.
Comptroller General Staats said in New York that "indexation at 85 percent of the CPI might be practical, but not at 100 percent." This brought a favorable reaction from businessmen attending the luncheon.
As to the accuracy of the CPI, Janet L. Norwood, commissioner of Labor Statistics for the US Labor Department, says it "certainly is not perfect, and it is not appropriate for all measurement purposes."
Some changes in the CPI have been made in the past year, others will soon be implemented, and still others are under consideration.
AFL-CIO economist Anne Draper defends the present CPI as a "fairly uncomplicated and understandable formula" for measuring the performance of the economy.
Some Carter administration officials, including Alfred E. Kahn, director of the Council on Wage and Price Stability, argue that the CPI exaggerates inflation.
But in trying to find a way to reshape the index to level off its upward curve a bit and thus reduce its inflationary pressures, they face the political problem of how to do it without further straining relations between the White House and organized labor in an election year.