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Faryn Balyncd

(5,125 posts)
Tue Dec 18, 2012, 01:56 PM Dec 2012

The "Chained CPI" Scam: a Race to the Bottom




Here are some views on "Chained CPI":


The Chained CPI Scam
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....Enter the Chained CPI. It's a measure of inflation that takes the substitution effect of consumers changing their buying habits in response to a rise in prices. If the price of steak goes up, the story goes, consumers buy more chicken and the government doesn't have to worry about making sure that retirees can keep up with the price of steak.

The steak/chicken analogy is popular among Chained CPI proponents, I suspect, because it's so inconsequential. Americans don't generally believe that society owes you a dry-aged porterhouse. Chicken will do.

Chained CPI proponents also like to talk about all of the gadgets out there. Once adopted, prices for televisions, microwaves, cell phones and computers of all types tend to plummet. One day, you can't afford the new iPad. A few years later, you can get something just as good at a bargain price.

It's easy to trivialize inflation with these anecdotes and analogies. It's also easy for politicians to argue that moving Social Security to the Chained CPI, as opposed to the current Consumer Price Index which measures the prices of a fixed basket of goods, is not a cut, it's just in line with reality. Yes, it will slow the growth of Social Security payments over time, but nobody will sacrifice anything.

Except that, they will. The Chained CPI is a race to the bottom. Maybe the idea of somebody giving up steak for chicken doesn't bother us. But the Chained CPI memorializes that consumer choice. What happens when the price of chicken rises? Somewhere down the line, you're eating potted meat like a hobo.



Here's another:





[link:http://www.beatingbuffett.com/?p=3858|
"How Government Should Cheat on the CPI"]



....Government agencies tell us we’re wrong and that prices have only risen 2 – 3% annually. They love to speak about ‘core inflation’ which excludes food and energy. Please raise your hands if you don’t partake of those items and thus don’t care about their costs.

This week’s Bloomberg Businessweek (Apr. 30 – May 6, 2012 issue) proposes a bipartisan deficit fix they say would produce $300 Billion in combined savings and tax revenues over the next decade. How would they accomplish this? Switch from the current standard CPI calculation – the Bureau of Labor Statistics market basket of 80,000 goods and services weighted to reflect what they claim are consumer spending patterns- to the BLS’s chained CPI.

What is chained CPI? The BLS says that when prices for specific items go up, consumers often substitute lower-cost goods instead of buying their old favorites. While the standard CPI measures the same basket of goods every month the chained CPI would assume steak lovers would trade down to hamburger or Granny Smith apple fans would settle for lower priced oranges should apple prices surge. Bloomberg suggested that consumers might even react to price increases in one item by going to another category altogether. If ‘bacon and eggs’ gets too expensive, why not simply have some cold cereal?

This alternative measure of including price substitutions is literally an apples-to-oranges comparison rather than noting the change in prices of exactly the same goods and services from the month before, as the average person would expect.

The chained CPI would assume that higher absolute prices force people to ratchet down their standard of living rather than pay more to maintain their normal choices. . .






If Republicans manage to manipulate Democrats into cooking the books to continue raiding the SS Trust Fund to subsidize general revenue deficits, what do you expect to be the theme of the 2014 campaigns?










10 replies = new reply since forum marked as read
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The "Chained CPI" Scam: a Race to the Bottom (Original Post) Faryn Balyncd Dec 2012 OP
Chained CPI ends up with people eating cat food! hedgehog Dec 2012 #1
and the hits just keep coming niyad Dec 2012 #2
It is a scam. jsr Dec 2012 #3
chained cpi distorts inflation by mixing in (a smaller rise in) spending increases unblock Dec 2012 #4
No, that's not how it works muriel_volestrangler Dec 2012 #9
chained CPI = smaller benefit hikes banned from Kos Dec 2012 #5
Kicked and recommended. Uncle Joe Dec 2012 #6
moot point. don't fall for the republican bullshit. spanone Dec 2012 #7
This makes my brain hurt. Can someone clarify at a 5th grade level for me? ceile Dec 2012 #8
It's a way of finding an average between the price rise for the expensive item muriel_volestrangler Dec 2012 #10

unblock

(51,974 posts)
4. chained cpi distorts inflation by mixing in (a smaller rise in) spending increases
Tue Dec 18, 2012, 02:15 PM
Dec 2012

the substition effect is how you COPE with inflation by switching to something cheaper because your income isn't rising as fast as prices.

if filet goes up 5%, and hamburger goes up by 5% as well, chained cpi shows inflation at LESS THAN 5% because some people switch to the cheaper food.

this is a clear cut fraud.

in fact the reverse could happen, in theory. if prices were completely unchanged, there's no inflation, right? but not if you got a raise! then you might switch from hamburger to filet, and voila! chained cpi says there's inflation because of the substitution effect.

intellectually, it's conflating spending changes with inflation changes.

from a policy perspective, it's a thin, cynical intellectual pretense to cut while pretending not to.

muriel_volestrangler

(101,150 posts)
9. No, that's not how it works
Tue Dec 18, 2012, 07:29 PM
Dec 2012

See http://www.democraticunderground.com/?com=view_post&forum=1002&pid=2018952 . Basically, it's a way to find an 'average' figure when people change their buying preferences between items with different inflation figures. The current way the indices are calculated just looks at the amounts people buy at the start of a period; the 'chained' way looks at both the start and the end of the period. If both filet and hamburger went up by 5%, chained CPI would show 5% too; if neither went up, but people switched from hamburger to filet (or the other way round), it would show 0%.

Because people will always tend to look for better value, it's always likely that a chained index will show inflation lower than the simple version. Items that increase in price slower will become more popular.

ceile

(8,692 posts)
8. This makes my brain hurt. Can someone clarify at a 5th grade level for me?
Tue Dec 18, 2012, 02:29 PM
Dec 2012

So, if I don't buy the expensive item (price went up and now I can't afford it) then the price increase didn't happen? So they don't need to include it in inflation stats?
And what does this have to do w/ SS?

muriel_volestrangler

(101,150 posts)
10. It's a way of finding an average between the price rise for the expensive item
Tue Dec 18, 2012, 07:43 PM
Dec 2012

and the price rise for the cheaper item you buy instead. I did a worked example in the post I link to in reply #9 above; if steak went up 100%, and hot-dogs went up 50%, and you switched from all steak to all hot-dogs, the chained CPI inflation figure would be 73%.

Or, as another example, if product A went up 21%, and product B didn't change in price, and you switched from all product A to all product B, the chained figure would be 10%.

It doesn't have anything to do with SS, except that it would be a difficult-to-understand (and thus easier to get away with) way to keep the SS increases smaller. You might say that, in theory, it's 'more correct', but in practice (as that linked post says), inflation for elderly people is almost certainly underestimated because they have to spend more on healthcare than younger people, and that goes up faster.

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