Use and Misuse of the Consumer Price Index

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To paraphrase my grandfather, a dollar doesn't go as far as it used to. This is one of the oldest saws in economics, so often used that we accept it as truth. The time value of money is central to modern financial theory, and is the foundation of indexing that applies to entitlement programs, tax brackets, rents, and (in some cases) pay.

Yet many are now arguing that a dollar goes a lot further than we think. Having come full circle in our 25-year battle against the price level, we are now engaged in a reexamination of what inflation is and what role indexing should have in our economy. At the center of the growing debate is our old friend the consumer price index (CPI).

Once a relatively esoteric economic variable, inflation …