The consumer price index (CPI) is a method of measuring inflation in the U.S. economy. A chained CPI is another method of measuring inflation that is tied to what consumers buy. It is a controversial method that has the support of economists but tends to worry consumers.
The CPI measures inflation by averaging the cost of the products average consumers buy each month. This tells the government how much prices are rising and how high inflation is. Economists believe inflation has been overstated and that consumers will choose to buy cheaper products instead of more costly, though favored, products when the economy is in a recession. The cheaper items consumers buy change the real consumer price index.
Chained CPI works like regular CPI except it notices the changing buying habits of consumers. It is called chained CPI because it actually is tied to spending. It is a more correct way of measuring how much consumers are spending each month on the things they need. For example, if consumers start buying cheaper white bread instead of more expensive wheat bread, then the chained CPI will show that change. This tells the government that consumers are saving money and the cost of living is not rising as quickly as it may seem.
Showing world markets that the United States is on the right financial track and thereby increasing the confidence of investors is the purpose of chained CPI. It also is supposed to help lower the U.S. deficit. The government would save money using a chained CPI because government benefit programs, such as Social Security and veterans’ benefits, would be adjusted on a yearly or bi-yearly basis. The adjustments would be made based on a more accurate reflection of the cost of living, preventing any overpayment in benefits.
There are two reasons why the American people are wary of chained CPI. One reason is that it would lower the benefits that people receive. While that saves the government money, many see it as cutting benefits to those who need it most and who are already struggling.
The other reason people are not happy with the idea of the CPI measure is that it is expected to lead to an increase in taxes. The pace at which tax brackets and deductions rise would be slowed. The upper class would not see much of a tax increase, but the lower and middle classes could see a significant increase over time. Certain tax credits that benefit the middle and lower classes would likely disappear.