An Opinion on the Renewed Push to Use the C-CPI for COLA, Inflation Indexing

The C-CPI is designed to reduce the level of reported inflation that otherwise would be used by individuals to make decisions tied to their investments and income. The C-CPI looks like it has a strong chance of being used as a new federal parasite to drain consumer liquidity.

April 8th, 2013
Shadow Stats

The Chained-CPI (C-CPI) is a fully-substitution-based version of the CPI-U, which is the primary inflation measure published by the U.S. government’s Bureau of Labor Statistics. The C-CPI is designed to reduce the level of reported inflation that otherwise would be used by individuals to make decisions tied to their investments and income. As a vehicle for artificially reducing COLA adjustments for such programs as Social Security, its proposed use here appears to be a rare area of agreement between both sides in the current budget-deficit negotiations.

Those in the federal government who are honest and forthright with the American public—at least about the proposal to understate the official rate of inflation for purposes of budget reduction—have failed to drive a wooden stake through the heart of the C-CPI. Arising from its second, premature political burial, the C-CPI looks again like it has a strong chance of being used as a new federal parasite to drain consumer liquidity. Like a vampire bat that sucks only enough blood for self-nourishment—leaving its victims alive for further abuse—the use of the C-CPI as a cost-of-living adjustment (COLA) measure is designed to suck real disposable income from the limited cash-flow of Social Security recipients, for the benefit of politicians who do not have the guts to vote against Social Security.

Those receiving, or who will be receiving Social Security payments were forced to pay into the system for all of their working lives, and generally believed the U.S. government would treat them fairly and honestly. The bloodsuckers in Washington have hit their victims similarly, before, back in the 1980s with the introduction of hedonic-quality adjustments to inflation, and in the 1990s with the change of concept in the CPI to a quasi-substitution-based inflation measure. Previously, the CPI measured inflation for a fixed-weight basket of goods, which measured COLAs as an inflation adjustment needed to maintain a constant standard of living.

As noted earlier in this missive, these methodological changes have altered the CPI-U and its more narrowly defined variant, the CPI-W, so that they no longer measure those costs of maintaining a constant standard of living (substitution effects) and no longer measure out-of-pocket costs (hedonic-adjustment effects). Without the changes made to CPI calculations of the last several decades, Social Security payments would be more than double what they are today. Indeed, with the use of a substitution-based index (the C-CPI is fully substitution based), the resulting cost of living adjustments promise only a declining standard of living. Expanding the example that former Federal Reserve Chairman Alan Greenspan often used, where, as the price of steak rose, consumers would shift to hamburger, so too with higher hamburger costs have some cash-strapped retirees actually shifted consumption to dog food.

The President and Congress must address Social Security and other programs, such as Medicare, restructuring them so as make them solvent over the long haul, eliminating the horrendous levels of unfunded liabilities that are deteriorating at an aggregate pace in excess of $5 trillion per year on a net-present-value basis (see the Hyperinflation Report). With discussions instead focusing on using the outright deceit of implementing the C-CPI to cut COLA, those controlling the government appear to lack the political will to make needed changes in a straight-forward manner. Under those circumstances, there can be no meaningful budget deal structured by the negotiators in Washington.

The government must be honest with its citizens. If the government cannot afford to pay full COLAs, it is better to indicate that upfront, rather than to try to fool individuals as to the actual level of inflation they have to overcome in order to maintain their living standards. Cutting benefits by stealth and deceit may be politically expedient for the miscreants playing this game, but it is utterly unconscionable.

Beyond the damage caused by the C-CPI not reflecting out-of-pocket costs, and no longer measuring the cost of living of maintaining a constant standard of living, the C-CPI is not a practical measure for being used as a COLA or other benchmark inflation measure.

No Fixed Index Level for Reliable Cost Escalations in Contracts. As a separate issue, beyond the C-CPI not reflecting the cost of living of maintaining a constant standard of living or of reflecting full out-of-pocket consumer expenses, it cannot be published on a timely-enough basis to make it feasible as an annual-COLA factor.

The following graph shows the regular net revisions to year-to-year inflation in the Chained-CPI, published February 21, 2013 for the years 2011 and 2012. In contrast, the CPI-U and CPI-W never are revised on a not-seasonally-adjusted basis (barring an outright error in calculation).

That feature enables the use of the CPI-U and CPI-W as inflation-adjustment and cost-of-living-adjustment (COLA) measures in contracts, COLA adjustments to Social Security, etc. Although designed as a consumer-damaging, budget-cutting replacement for the CPI-W in goverment COLA adjustments, the C-CPI reporting is unstable, since it goes through regular revisions every year, for the two prior years. As shown in the following graph, the latest revisions would have suggested an upside revision of about three-tenths of a percentage point to any COLA adjustment would have been made previously for 2011.

As discussed by the BLS in its February 21, 2013 press release: “Because the current expenditure data required for the calculation of the C-CPI-U are available only with a time lag, the index is issued first in preliminary form, using the latest available expenditure data at the time of publication, and is subject to two subsequent revisions. Therefore, C-CPI-U indexes for the 12 months of 2011 [now] are issued in final form – employing monthly expenditure weights from 2011. Values for the 12 months of 2012 are revised and issued as interim, using expenditure weights from the 2009-2010 period. Calculation of the initial value of the January 2013 C-CPI-U index, and all subsequent months in 2013, will also be based upon 2009-2010 expenditure weights.”

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