There’s renewed interest in using the “Chained CPI” as a replacement for the “current CPI” for cost-of-living increases in such items as Social Security. Here are some facts.

  1. Its complete name is the “United States Chained Consumer Price Index”.
    • It was created by the Bureau of Labor Statistics (BLS) in 2000.
    • It’s also known as the C-CPI-U.
    • It’s also known as the chain-weighted CPI.
    • It’s also known as the chain-linked CPI.
  2. It’s based on the theory that consumers choose less-expensive substitutes.
    • NOTE: The “current CPI” also takes substitutions into account, by adjusting the “market basket” of goods that it represents in January of even-numbered years, and also adjusting for less-expensive goods and services within each element. The Chained CPI makes adjustments for the less-expensive substitutes by making changes to less expensive goods and services, both within and outside of the elements.
  3. METHODOLOGY FOR COMPUTING CURRENT CPI:
    • BLS makes monthly calculations of average prices.
    • It uses 211 different categories of goods and services in 38 different urban areas, for a total of 8,018 (211 X 38) different elements.
    • BLS uses one set of weights for CPI-U and another set of weights for CPI-W, each of which is updated in January of even-numbered years (at the time the market basket is re-adjusted).
  4. SUBSTITUTION EXAMPLE:
    • Consumer buys one type of apples until the price increases, at which time the consumer buys cheaper apples. The current CPI takes this substitution into account, because it’s within the “apple element”.
    • BUT if consumer switches, say, to oranges, this is within the “citrus element” of the “market basket”, and so will not be accounted for in the current CPI until January of the next even-numbered year. C-CPI-U takes this switch into account in the very next month.
  5. C-CPI-U has averaged 0.3% lower per year than CPI in years since 2000.
    •  [For example, the recent 1.7% increase used as a Social Security COLA would have averaged about 1.4% under C-CPI-U.]
  6. MAGNITUDE OF THE DIFFERENCE OVER 10 YEARS
    • 1.017% for 10 years leads to a loss for each $1,000 monthly of $1,862
    • 1.014% for 10 years leads to a loss for each $1,000 monthly of $1,558
    • Difference = $1,862 less $1,558 equals $304 annually (2.5% of $12,000), $25 monthly
    • Of course, the original $1,000 won’t be reduced; it’ll just buy less.
  7. President Obama and the Republicans seem to favor the C-CPI-U.  Democrats, the AARP and the AFL-CIO seem to be among those who do not like the switch.