Keeping the CPI honest
There is at least one area where the new administration could effectively begin the fight against inflation. This is a thorough review and overhaul of the Consumer Price Index (CPI), the basic formula now used to measure the inflation rate within the US.
Many economists have long argued that the current CPI exaggerates the degree of inflation. If the CPI was just an academic exercise pursued by economists and statisticians in graph-and chart-cluttered rooms, there would be no problem. But when that index becomes the yardstick for wage settlements and escalator clauses involving roughly one quarter of the entire US population, as is the case, something more serious is involved here.
Wages and salaries of at least 6 million workers are directly tied to the CPI. In addition, social security benefits, federal retired worker benefits, food stamp allotments, and welfare payments are linked to the index. By one conservative estimate, every 1 percent increase in the CPI leads to a whopping rise of $1 billion in wages and benefits.
The main criticism of the index is that it overstates the cost of housing, when in fact very few Americans are actually buying homes at any point in time. Some analysts suggest treating housing and mortgages costs (where current interest rates are soaring) separate from the basic "market basket" approach of the index. The Reagan team might want to look at the Canadian method, for example, where house price changes are based not on the purchase price of a new home (as in the US), but on average monthly mortgage payments for specific types of homes.
Also, some economists believe that the fixed "market basket" of goods and services does not adequately take into account current, as opposed to past, spending habits. Spending on gasoline and energy, for example, has fallen somewhat during the past year --in the CPI.
Inasmuch as the CPI fuels demands for ever higher benefits, it is important that it reflect the true state of affairs. We hope the new administration will not delay in taking a fresh look -- and ensure that inflation is measured accurately.