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1 1 (June 18, 2002)

handle is hein.crs/crsahxs0001 and id is 1 raw text is: Order Code RS21245 June 18, 2002 The Chained Consumer Price Index: A Brief Explanation Brian W. Cashell Specialist in Quantitative Economics Government and Finance Division Summary The consumer price index (CPI) is probably the most important measure of inflation published by the federal government. It is used to adjust Social Security benefit payments as well as personal income tax brackets to keep up with inflation. Nonetheless, it has been subject to criticism. Because the CPI does not take into account consumers' ability to insulate themselves from inflation by changing their spending patterns, it overestimates how much they would need to raise total spending to maintain a constant standard of living. This is referred to as substitution bias. As part of the continuing effort to improve the CPI, the Bureau of Labor Statistics (BLS) is introducing a supplemental measure which will be known as the chained consumer price index for all urban consumers (C-CPI-U). The C-CPI-U uses continuously updated expenditure weights, and thus reflects changes both in prices and in the composition of the consumer marketbasket. Because the new C-CPI-U will be subject to revision, with the final release two years after the reference date, it is an unlikely alternative for automatic indexing provisions. This report will not be updated. The consumer price index (CPI) is probably the most important measure of inflation published by the federal government. Published by the Bureau of Labor Statistics (BLS) of the Department of Labor, it is used to adjust Social Security benefit payments as well as personal income tax brackets to keep up with inflation.1 Nonetheless, it has been subject to criticism.2 The Current CPI Is a Fixed-Weight Index 1 Actually, there are two CPIs. The consumer price index for all urban consumers (CPI-U) and the consumer price index for urban wage earners and clerical workers (CPI-W). Social Security benefits are indexed to the CPI-W, and income tax brackets are indexed to the CPI-U. 2 In 1996, a group commissioned by the Senate Finance Committee issued a report which examined the CPI and made specific recommendations. See: Toward a More Acurate Measure of the Cost of Living, Final Report to the Senate Finance Committee from the Advisory Commission to Study the Consumer Price Index, Michael Boskin, Chairman, Dec. 4, 1996. Congressional Research Service **o The Library of Congress CRS Report for Congress Received through the CRS Web

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