GovSpeak: Chained CPI

Chained CPI is one element of the budget blueprint President Obama released last Wednesday (April 10) that is getting a lot of attention. So what, exactly, is chained CPI? It’s short for “Chained Consumer Price Index for All Urban Consumers,” also referred to as C-CPI-U, and is, essentially, another way to index federal spending—including Social Security benefits—and taxes to the rate of inflation. Social security benefits currently are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Benefit levels rise over time, whatever index is used, because $1 in 2013, for example, is worth less than that $1 in $1993.

While chained CPI currently is not used as an adjustment mechanism by any federal legislation, its proponents claim that it is a more accurate measure of how much the cost of living actually increases, because it takes into account the substitutions that consumers make when the prices of certain items rise. The term “chained” refers to how the index is calculated: the “basket” of goods and services it measures changes from one month to the next, with each link in the chain referring to new weightings of the data rather than the index’s original assumptions (the basket’s original contents). If the cost of apples goes up, for example, consumers might buy bananas instead; this is the type of substitution that is factored into chained CPI. The rate at which benefit levels would rise thus would be slower with chained CPI than with CPI-W; since the Bureau of Labor Statistics (BLS) began calculating and publishing a chained CPI in 2000, it has been about 0.3 percentage points lower than CPI-W. Want to know more about how this works? BLS offers a more detailed explanation.

The use of chained CPI has become a popular idea because it could significantly reduce the deficit through a technical change, saving the federal government about $130 billion over the next decade. It would do so by both reducing the rate of growth in benefits and increasing the amount of taxes collected.  In the federal leasing realm, CPI-W is used as a measure to determine the amount of expense reimbursement due landlords. There has been no indication thus far that this current CPI reimbursement method will be replaced by chained CPI, and we question whether the chained measure would even be applicable.  Yet, the effort to introduce chained CPI is worth watching because it could have a macro-level impact on federal growth and expenditures that will ultimately impact the leasing sector.