Price Index Change Will Trim Inflation Rate
The Bureau of Labor Statistics announced the latest in a series of small changes in its measurement of consumer prices that will lop 0.1 percentage point off the nation's annual inflation rate.</br></br>Arcane details of how the consumer price index is constructed have become politically sensitive because of their potential impact on the federal budget. Because the CPI is used to calculate cost-of-living adjustments in a number of major federal benefit programs such as Social Security, any overstatement of inflation raises spending. At the same time, because the CPI is used to adjust for inflation the personal income tax brackets and the size of the personal exemption, it also influences revenue.</br></br>Fixing what the statisticians call "formula bias" will save the government roughly $2 billion in the first year, with the annual savings growing over time. The Clinton administration had estimated that this change would save 0.2 percentage point, taking the middle range of the BLS's earlier estimate of change, and used that higher figure in its latest budget projections. Because the change is kicking in six months earlier than planned -- it will start with the figures released in July -- the administration's estimate for 1997's budget isn't much affected.</br></br>However, the difference between a 0.1 and 0.2 percentage point reduction means the budget deficit would be about $5 billion higher in 2002 if no offsetting actions were taken, an administration official said.</br></br>The fix announced by the BLS focuses on a glitch in compiling the CPI that was discovered by BLS researchers two years ago. The problem arises when an item happens to be on sale when it is included in the CPI for the first time. When its price returns to the usual level, it gives an unwarranted boost to the index.