Inflation's Spring Makeover
BOSTON — Inflation in America, already near record lows, may shrink even more this week.
And not just because a flood of cheap Asian imports will keep a lid on prices.
When the US government releases January numbers for consumer inflation on Tuesday, it will also announce a tweak to the way it measures them.
Government technicians use a basket of goods - energy, cars, food, etc. - to measure the consumer price index (CPI), and this week they plan to rearrange the ingredients. The result will likely be lower numbers for inflation.
Computers, for example, with prices in a state of perpetual free-fall, will have greater weight, and cellular phones get tossed in for the first time.
The Bureau of Labor Statistics (BLS) rearranges its shopping basket once a decade, but this time the switch falls in with a controversial effort to change the way the CPI is calculated.
Squeeze on Social Security
Already, Social Security checks for 44 million Americans have been shaved by about $2.10 per month, thanks to technical adjustments to the CPI in recent years.Still, an annual cost-of-living raise put the average check at $765 last month, up from $749 the month before.
Several other changes in 1998 and '99 could keep the CPI down. President Clinton's Council of Economic Advisers recently said it expects a 0.41 percentage point decrease in inflation from what it would be otherwise.
The changes aim for greater accuracy. But they have political implications.
Three years ago, when a huge federal budget deficit alarmed many in Washington, Federal Reserve Chairman Alan Greenspan told Congress the CPI substantially overstated inflation.
His statement caused a furor because, if true, a "correct" measure of the CPI would reduce cost-of-living adjustments to pension checks and income taxes.
Bingo! Pension payments drop $225 billion over 10 years. Taxes go up without a politically costly congressional vote. The budget deficit shrinks rapidly. A very tempting move for politicians.
House Speaker Newt Gingrich soon told a town meeting in Georgia, "We have a handful of bureaucrats who, all professional economists agree, have an error in their calculations. If they can't get it right in the next 30 days or so, we zero them out; we transfer the responsibility to either the Federal Reserve or the Treasury, and tell them to get it right."
That didn't happen. The BLS still compiles the CPI, in part because the federal deficit began to disappear as expanding employment and a booming stock market brought higher tax revenues.
And many economists and others want nonpartisan civil servants, not politicians, measuring the CPI.
Washington's statistical agencies, notes Dean Baker, an economist at the Economic Policy Institute in Washington, have "a good reputation. They have not yielded to political pressure. No one suspects the numbers are cooked."
Some urge more change
A Senate Finance Committee advisory commission chaired by economist Michael Boskin urged about a year ago that an independent commission review CPI "progress" every three years. And it suggested that Congress adjust pension and income-tax indexing without waiting for the BLS. It figured the "upward bias" in the CPI at 1.1 percentage points a year.
So has the BLS made "progress?"
"They are doing some good things," says Mr. Boskin, an economics professor at Stanford University in California. "We believe they could responsibly move a bit more quickly and a bit more completely."
Congress has given the BLS more money to improve statistics-gathering, but Boskin says more money would help.
Barry Bosworth, of Brookings Institution in Washington, agrees. The market basket should be enlarged and updated every two years, not 10, he says. People change their buying habits more than once a decade.