Thursday, December 29, 2011

The chains of inflation

By Bob Confer

We have a federal government that has a spending problem and because of that it has a revenue problem, too. So what is a government to do? Congress could openly raise taxes, but doing so would hurt them come election time. So would cutting benefits. Anyway you put it, a spendthrift would be a marked man as would his pennywise foil.

The only option left for them is to do those tasks secretly. There would be no more clandestine way to do that than to manipulate the statistics that govern our public policy. That could happen with a little gimmick called the Chained Consumer Price Index. It has been proposed as a new way to calculate inflation and it really gained traction over the last six months as the dueling Congress looked for ways to address the deficit and debt in the long term.

Under the Chained CPI the standard CPI would be cast aside. In the current method, the cost of a fixed basket of goods and services is tracked over time and that growth in value represents the inflation rate. The Chained CPI would take that simple, straightforward calculation and turn it on its head, making it subjective and something of a fantasy. In the new method, the federal economists would adjust the basket for assumed changes in buying behavior; no longer would it be designated collection of items. In their eyes, if a shopper won’t buy a beef roast because it went up X dollars, he would probably buy a replacement meat, like pork chops. So, the Chained CPI would adjust for the modified basket (as theoretical as it may be) and track the price of the chops, noting its price variance (up or down) versus the roast that used to be in its place.

Since there’s a good chance that the modified basket will collectively feature lower-priced replacements, the Chained CPI will produce an inflation rate that is lower than today’s CPI. On average, it would cut the accepted inflation rate by a third of a percentage point per year. It doesn’t seem like much, but it is. Consider that inflation has been pegged to be 3.4 percent over the past 12 months. So, were the Chained methodology in play, it would bring that number down to 3.1 percent.

That small change would yield big results for a Congress afraid to do almost anything. It’s been said that over the first decade alone Chained CPI would shrink the deficit by $300 billion, through a combination of $100 billion in new tax revenues and $200 billion in spending cuts. That’s because the inflation rate affects a little bit of everything in the federal budget since it is used to determine both the revenue side and the cost side of things.

The new revenues would be achieved by sticking it to those who pay income taxes. Since wages will, in many cases, rise at a rate greater than what will be a much smaller inflation rate, more people will jump into higher tax brackets – more quickly, too - since those brackets are continually adjusted for inflation. At the same time, personal tax loopholes will grow at an equally smaller rate, preventing people from deducting higher dollar amounts that would have tracked the CPI now in place. We’re not talking peanuts, either: According to federal studies, over the first 10 years the tax burden for a low-income family would be 15% higher under the Chained CPI than it would be through the current CPI.

Significant cost savings would be gleaned from those who rely on the government for a retirement income. Social Security beneficiaries count on their benefits growing at a rate in step with inflation. In recent years the calculated rate of inflation has not been high enough to warrant a cost-of-living adjustment and seniors have been really feeling it. Imagine that pain for the long haul. In 2012, the adjustment will be 3.6 percent, but under Chained CPI it would be 3.3 percent. Following that trend, someone who starts collecting Social Security in the first year of Chained CPI will see $560 less per year after 10 years, and almost $1,000 less per year after 20 years.

The weight of Chained CPI will bring a good many people down. It’s an unscientific manner to calculate one of our economy’s most important statistics and an easy way for Washington to earn and save money, without making the hard, important decisions they should.

Bob Confer is a Gasport resident and vice president of Confer Plastics Inc. in North Tonawanda. E-mail him at


This column originally ran in the 02 January 2012 Greater Niagara Newspapers

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