Quick Note on the Chained CPI

October 1st, 2011 at 11:06 pm

A number of commenters on my initial post believe the chained CPI just disguises the decline in well-being when people make substitutions to less desirable purchases.  I don’t think so, but I think the impression comes from the canonical example: if the price of steak rises, people will buy more chicken, and that makes the chained index grow more slowly.

But substitutions don’t have to always go from more desirable to less desirable goods.  That’s why I used this e.g. earlier: if the price of steak falls relative to chicken, shoppers might buy more steak and less chicken.  This is true even while the price of steak remains higher than that of chicken (though the difference between them is less than it was last month).

The chained index tends to grow more slowly not because people are always switching to absolutely cheaper goods, but because they’re responding to declines in price changes in one good relative to another.


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8 comments in reply to "Quick Note on the Chained CPI"

  1. urban legend says:

    I still say: what possible legitimate reason could we have for taking the slightest bit away from anyone’s present or future middle class income — other than to appease the Serious Ones who want to somehow reduce “entitlements,” who in turn are trying to appease the loonies who hate “entitlements” anyway and want to make deep cuts in them because — well just because? Because it pisses off liberals, I guess. Wanting to appear reasonable to Washington pundits is not a legitimate justification, and I can see no other explanation for any progressive entertaining such a notion.

    Why can’t we hold firm for once instead of always succumbing to their chipping away at us? The idea of “shared sacrifice” is absurd and insulting to the average American who has done all of the sacrificing for the past 30 years. The commenter on the previous post who noted the BLS CPI for the elderly as evidence that the standard CPI understates the true inflation for seniors really put the nail in the coffin for this fundamentally indecent idea. Is there, by the way, ever a case where the chained CPI ends up with a higher index than the regular CPI. If the case is going to be made that it can cut both ways — and I suspect that is inherently flawed logic, and that the very concept is intended to reduce cost-of-living adjustments — then there must be examples of it cutting the other way. I don’t see any sign of them with the ever-widening curves.

    Let’s not forget that “little” changes to middle class incomes really devastates their discretionary income. A 3% reduction for someone making $40,000 — gee, that’s not so bad, right? — may essentially eliminate any genuine discretionary income. We also cannot forget that any loss of income for anyone in the middle class (and the poor) hurts every other average American, because it makes wage reduction for everyone else that much easier.

    • urban legend says:

      I looked again at the graph in Jared’s previous column, and it is indeed a steady and invariable march over the last 10 years to lower results for the chained CPI. Accordingly, it can be nothing more nor less than a consciously designed concept for lowering cost-of-living increases. Given (a) the BLS evidence that even the standard CPI understates real cost-of-living increases for seniors, and (b) the sorry state of middle class incomes in general, there can be no justification for the chained CPI other than reducing benefits for Social Security recipients — i.e. for making medium to low income seniors less well off by “sharing the sacrifice.” That strikes me as an incredibly stupid idea in an economy like this.

  2. pjr says:

    That’s a nice try at getting out of the box, but I’m not at all convinced yet. People respond to price changes and to disposable income changes, no? If people’s incomes were rising, and consequently they were eating more and more expensive steak and less and less inexpensive chicken, what would the chained CPI look like relative to the CPI? Does the chained CPI feed an upward or downward spiral in living standards?

  3. Cat says:

    The chained CPI can’t show us if we are all eating locally grown farm fresh food or we are all eating CHON food made in a factory.

    These distinctions matter since CPI is used as a guide in making social policy.

    I know its nor fair that your field has been co-opted and used as justification for social policies and so academic arguments, like which is a better measure of inflation, take back seat to what they mean “in the wild”, but thats the hand you were delt. Sorry.

  4. Carol says:

    “But substitutions don’t have to always go from more desirable to less desirable goods.”

    It depends on whether you consider cat food a step up from spam or not.

  5. Craig says:

    Anti-chainers are going to need a better argument than steak versus chicken. I have a hard time engaging with the idea that providing enough _steak_, as opposed to chicken, for our senior citizens is a national imperative.

    Social Security is about keeping seniors out of poverty, about providing a basic level of human dignity to our elders. This is a sacred obligation, and a compact between successive generations. Providing seniors with their preferred choice of protein is not.

  6. Gary says:

    The most persuasive argument I have heard against using CPI for determining SS increases is that older folks spend a disproportionate amount of their income on health care. And we all know that increases in health care costs consistently outpace almost everything else.

  7. Michael says:

    But economists are admittedly lousy at measuring quality.

    This puts aside the fact that there is inherent inflation in the slow and continuous degradation of food quality.