Dewonkify - Chained CPI

Word: Chained CPI

Meaning: A revised method of calculation for the Consumer Price Index (CPI) that the Bureau of Labor Statistics (BLS) could use to estimate inflation, which takes into account assumptions about how people spend money.

Used in a sentence: "Chained CPI is one of many ways to approximate the impact to consumers' pocketbooks of rising or falling prices."

What it really means: Chained CPI is a clever way of saying "slow the growth of inflation" without actually coming out and saying it. Currently, CPI is calculated by BLS based on data collected on the prices paid by consumers for goods and services. Chained CPI would add another level to this calculation by taking into consideration what consumers might buy in place of something that has become too expensive. For example, if you plan on having broccoli for dinner tonight and head to the store to get some, but then you realize the cost of broccoli has gone up since the last time you were in the store, you might settle for spinach instead. Now, instead of everyone paying more for broccoli, consumers are choosing other vegetables, so the demand for broccoli goes down, and eventually so does the price. Overall, the impact is a much slower rate of inflation.

The Catch: So, what does slowing inflation actually mean politically, and why is it suddenly getting all of this attention—from Democrats and Republicans? You have probably heard chained CPI being discussed as an offset (link to old blog) for part of the current deficit negotiations. Slowing inflation would be a huge cost saver for the federal government because of all of the programs tied to the CPI, with Social Security the most popular example. The benefits that seniors receive are updated annually to account for inflation, and that update is calculated based on the BLS CPI estimates. If chained CPI goes into effect, Social Security checks annual increases could get smaller and smaller.

In addition to Social Security, chained CPI would also slowly affect tax rates because the IRS updates tax brackets...