Technically called the Chained Consumer Price Index for All Urban Consumers (C-CPI-U), it is commonly referred to as a “superlative” index--a term economists use for the mathematical formula. The “Superlative” CPI’s mathematical formula is a significant departure from that used for the Consumer Price Index for Urban Wage Earners and Workers (CPI-W), which is currently used to calculate COLAs. Rather than track changes in the price of goods and services in a fixed market basket, the “Superlative” CPI will track how consumers substitute less expensive items when prices on other items go up.

The “Superlative” CPI was a key recommendation of The Advisory Commission to Study the Consumer Price Index chaired by Michael Boskin, which delivered its final report in 1996. The commission concluded that the CPI overstates inflation by 1.1 percentage points per year because, they said, it does not adequately account for such things as consumer substitution behavior, quality improvements and discount outlets.

In June of 1997, the Commissioner of the Bureau of Labor Statistics (BLS), Katherine Abraham, said in a statement to the House Joint Economic Committee that the Boskin commission’s proposed formula “has been shown to produce price changes that systematically understate the increases in the cost of living.” Nevertheless, since the release of the Boskin commission’s report, the BLS has quietly implemented many of the recommendations. This has led both the Congressional Budget Office (CBO) and the Social Security Trustees to revise their estimates of future inflation and COLA payments downward. While the “Superlative” CPI will not be used for calculating COLAs yet, legislation is pending in the House that would tie the annual increase to the new index.

Economist Martin Armstrong of the Princeton Economic Institute wrote in 1996 that the CPI changes are “an attempt (by lawmakers) to deal with entitlements without having to confront voters. The real beauty of this scheme,” he says, “is that Social Security will be cut without having to call it a cut since only the CPI will be revised directly—not entitlements.” 

Sources: “An Introductory Look at the Chained Consumer Price Index,” Bureau of Labor Statistics, March 14, 2202. “New Supplemental Index of Consumer Price Change,” Bureau of Labor Statistics, February 20, 2002. “Measurement Issues in the Consumer Price Index,” Statement of Katherine Abraham, Commissioner of the Bureau of Labor Statistics, June 1997. “Greenspan’s Virtual Reality, Why Inflation is Really Understated Not Overstated,” Martin A. Armstrong, Princeton Economic Institute, Vol. 3, Issue 9, 1996.

For more on this issue, read “‘Superlative’ CPI Could Cut COLAs” at http://www.tscl.org/NewContent/101493.asp.

July 2002