Word: Chained CPI
Meaning: A revised method of calculation for the Consumer Price Index (CPI) that the Bureau of Labor Statistics (BLS) could use to estimate inflation, which takes into account assumptions about how people spend money.
What it really means: Chained CPI is a clever way of saying “slow the growth of inflation” without actually coming out and saying it. Currently, CPI is calculated by BLS based on data collected on the prices paid by consumers for goods and services. Chained CPI would add another level to this calculation by taking into consideration what consumers might buy in place of something that has become too expensive. For example, if you plan on having broccoli for dinner tonight and head to the store to get some, but then you realize the cost of broccoli has gone up since the last time you were in the store, you might settle for spinach instead. Now, instead of everyone paying more for broccoli, consumers are choosing other vegetables, so the demand for broccoli goes down, and eventually so does the price. Overall, the impact is a much slower rate of inflation.
The Catch: So, what does slowing inflation actually mean politically, and why is it suddenly getting all of this attention—from Democrats and Republicans? You have probably heard chained CPI being discussed as an offset (link to old blog) for part of the current deficit negotiations. Slowing inflation would be a huge cost saver for the federal government because of all of the programs tied to the CPI, with Social Security the most popular example. The benefits that seniors receive are updated annually to account for inflation, and that update is calculated based on the BLS CPI estimates. If chained CPI goes into effect, Social Security checks annual increases could get smaller and smaller.
In addition to Social Security, chained CPI would also slowly affect tax rates because the IRS updates tax brackets based on inflation—this keeps people’s taxable rates in line with cost of living increases in salaries. If CPI slows down, salaries will rise ahead of the IRS adjustments, meaning some Americans will pay higher taxes.
CPI also determines reimbursement rates for some health care providers in the Medicare system. Annual updates to these rates would not be as high if chained CPI were implemented. Given productivity updates and cuts implemented as part of the Affordable Care Act, the slower growth of CPI could cause problems for some providers.
What’s interesting about chained CPI is that it has been supported by both Democrats and Republicans. Even though it cuts spending (Medicare and Social Security) and raises taxes, it has unique bipartisan support. While some Democrats are skeptical about the impact it will have on seniors, Obama has been on record supporting it. The chained CPI proposal was dropped during round one of the fiscal cliff negotiations, but is likely to resurface as Congress looks for a long term solution to the debt.
If you are interested in reading more on chained CPI, see these articles:
“Chained CPI: The Sneaky, Complicated Idea That Could End the Fiscal Cliff Showdown—Explained” (The Atlantic) http://www.theatlantic.com/business/archive/2012/12/chained-cpi-the-sneaky-complicated-idea-that-could-end-the-fiscal-cliff-showdown-explained/266098/
“What is Chained CPI” (The Washington Post) http://www.washingtonpost.com/blogs/2chambers/wp/2012/12/17/what-is-chained-cpi/©2014 Drinker Biddle & Reath LLP. All Rights Reserved