Getting Prices Right: The Debate over the Consumer Price Index

Getting Prices Right: The Debate over the Consumer Price Index

Getting Prices Right: The Debate over the Consumer Price Index

Getting Prices Right: The Debate over the Consumer Price Index


Compiled by the Bureau of Labor Statistics, the CPI is used to index Social Security payments and many other federal programs, as well as to adjust tax brackets. Today, the accuracy of the CPI is being hotly debated, particularly in light of the Boskin Commission report that concluded in December 1996 that the CPI overstates inflation by 1.1%. If accepted and applied in the formulation of economic policy, the report would have major implications for balancing the federal budget. It would have a direct impact on the lives of Americans who are beneficiaries of government programs as well as on everyone who pays taxes. In this book, Dean Baker introduces and explains the significance of the debate, presents the full text of the Boskin Commission report and finally discusses in a far-reaching and insightful analysis both the Commission's research methodology and its conclusions.


The construction of government statistics is not ordinarily a topic that draws much attention. Even most economists would rather not be bothered with the details of how statistical agencies assemble the data that is vital to economists' research. The release of the Boskin Commission report in December 1996 changed all this. Suddenly press conferences on the accuracy of the consumer price index (CPI) were drawing overflow crowds. Newspapers and television reports were filled with late-breaking stories on the CPI. The report itself became one of the hottest documents in Washington.

Why the sudden interest in the CPI? Two years earlier, Federal Reserve Board Chairman Alan Greenspan told Congress that he thought the CPI overstated the true rate of consumer inflation by at least 1.0 percentage point annually. Furthermore, he suggested that Congress take this overstatement into account in setting indexation formulas for government benefits and income tax brackets; under current law, both are adjusted each year by the rate of inflation reported by the CPI. After 10 years, the cumulative impact of lowering the indexation formulas by 1.0 percentage point a year would be a reduction in the federal debt of $700 billion.

The Senate Finance Committee proceeded to hold hearings on the accuracy of the CPI in the winter and spring of 1995. Fifteen economists gave their assessments, and in June the Finance Committee appointed five of these economists to a commission to determine the extent of any bias in the CPI and to recommend improvements in the index's accuracy. The five economists were Ellen Dulberger, a research economist at IBM; Robert Gordon, a professor at Northwestern University; Zvi Griliches and Dale Jorgenson, professors at Harvard University; and Michael Boskin, a professor at Stanford University. Boskin, who also served as head of President Bush's Council of Economic Advisors, was selected as chairman.

In its interim report, released in September 1995, the Boskin Commis-

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