The Chained Consumer Price Index:
What Is It and Would It Be Appropriate
for Cost-of-Living Adjustments?

Julie M. Whittaker
Specialist in Income Security
April 5, 2013
Congressional Research Service
7-5700
www.crs.gov
RL32293
CRS Report for Congress
Pr
epared for Members and Committees of Congress
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net





Congressional
Briefing Conference:
Capitol Hill Workshop
Politics, Policy, and Process
The definitive overview of
how Congress works.
This intensive course is offered as a
3-day public Briefing and as a tailored
on-site 3, 4 or 5-day program.
Public Briefings are offered throughout the year in Washington, DC.
Space is limited.
Dates, Agenda, Previous Faculty, and Secure Online Registration:
TCNCHW.com
On-site Congressional Briefings and
Capitol Hill Workshops for agencies:
CLCHW.com
703-739-3790 TheCapitol.Net
All of our courses and workshops include extensive
interaction with our faculty, making our courses
and workshops both educational as well as mini-
consulting sessions with substantive experts.

Our Upcoming Schedule of Courses can be seen
Non-partisan training and publications that show how Washington works.
online on our web site or at TCNCourses.com.
PO Box 25706, Alexandria, VA 22313-5706
All of our courses and any combination of their
703-739-3790 • www.thecapitol.net
topics can be customized for on-site training for
TheCapitol.Net is on the
your organization—we are on GSA Advantage,
GSA Schedule, 874-4,
Contract GS02F0192X.
for custom on-site training.
GSA Contract GS02F0192X
thecapitol.net
Courses approved for CEUs from George Mason University
703-739-3790

The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?

Summary
The U.S. Bureau of Labor Statistics (BLS) publishes two important measures of inflation: the
Consumer Price Index for all Urban Consumers (CPI-U) and the Consumer Price Index for Urban
Wage Earners and Clerical Workers (CPI-W). The CPI might seem like just another economic
indicator, but it could be a powerful policy lever. Because the CPI-W is used to calculate annual
cost-of-living adjustments (COLAs) to Social Security retirement benefits and the CPI-U is used
to calculate annual inflation adjustments to personal income tax brackets, for example, changing
the basis of the automatic adjustments could substantially affect outlays and revenues, and
thereby, the budget deficit.
BLS has since August 2002 been publishing a supplemental measure known as the Chained
Consumer Price Index for all Urban Consumers (C-CPI-U). The aim of the C-CPI-U is to produce
a measure of change in consumer prices that is free of substitution bias. One of the difficulties in
estimating cost-of-living changes is that consumers often alter their buying patterns in response to
changing relative prices. In other words, consumers tend to buy more of the goods and services
whose prices are rising slower than average and fewer of the goods and services whose prices are
rising faster than average. Substitution is believed to insulate consumers from the full effect of
rising prices on maintaining their standard of living. Because the CPI-W and CPI-U do not
entirely account for substitution, they overstate the impact of inflation on consumer well-being.
As a result of better reflecting consumer substitution, the C-CPI-U has typically increased to a
lesser extent than either the CPI-U or CPI-W. This relationship has prompted calls for switching
to the C-CPI-U when calculating automatic adjustments to inflation-indexed federal programs
and individual tax provisions to slow growth in the budget deficit. The 2010 “Simpson-Bowles”
report recommended government-wide replacement of the CPI-W and CPI-U with the chained
CPI, for example. Recently, a bipartisan House amendment to the FY2013 budget resolution
would have used the Simpson-Bowles report recommendations as a basis for establishing the
budget. Although the amendment failed, its being offered suggests that some Members remain
interested in changing inflation measures to curb growth in the budget deficit.
That the CPI-W and CPI-U are not revised makes them attractive for use in calculating cost-of-
living adjustments. Unlike them, the C-CPI-U is subject to two revisions after its first release. If
the two indexes were replaced by the C-CPI-U, cost-of-living adjustments would either have to
wait until the final number was available or rely on preliminary estimates that could change up to
two years after the fact. Whether the preliminary C-CPI-U estimates might be attractive
alternatives to using the final estimate depends on whether they are biased relative to the final
number or if the revisions tend to be significant. If the final index tends to rise more than the
preliminary estimates, it might make their use unpopular with those who would be affected. More
specifically, because increases in the C-CPI-U have tended to be smaller than in either the CPI-W
or CPI-U, some Social Security beneficiaries, taxpayers, and individuals whose eligibility for
federal programs is based on the poverty threshold (e.g., food stamps) might oppose switching to
the C-CPI-U.

Congressional Research Service
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net

The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?

Contents
Introduction ...................................................................................................................................... 1
Methodological Differences Between the Standard CPI and the C-CPI-U ..................................... 3
The CPI-U and CPI-W .............................................................................................................. 3
The C-CPI-U ............................................................................................................................. 4
Statistical Differences Between the CPI and C-CPI-U .................................................................... 7
Policy Considerations ...................................................................................................................... 9

Figures
Figure 1. The CPI-U and the C-CPI-U ............................................................................................ 8

Tables
Table 1. Number of Months After Reference Month That Data Are Released ................................ 7
Table 2. The C-CPI-U, the CPI-U, and the CPI-W .......................................................................... 7

Contacts
Author Contact Information........................................................................................................... 10
Acknowledgments ......................................................................................................................... 10

Congressional Research Service
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net

The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?

Introduction
The Consumer Price Index (CPI) is probably the most important measure of inflation developed
by the federal government because it is used to make automatic adjustments that affect both
outlays and revenues. The Consumer Price Index for Urban Wage Earners and Clerical Workers
(CPI-W) is the basis for adjusting Social Security retirement benefits1 and the Consumer Price
Index for All Urban Consumers (CPI-U) is the basis for adjusting personal income tax brackets2
to keep up with inflation, for example. Changing the government’s basis for indexing these
among other federal programs and tax provisions from the CPI-W and CPI-U could have
substantial effects on the budget deficit.3 (Hereinafter in this report, the CPI-W and CPI-U will be
referred to collectively as the standard CPI.)
Then-Chairman of the Federal Reserve Board Alan Greenspan suggested in testimony before the
House Budget Committee in 2004 that Congress consider replacing the standard CPI with the
Chained CPI for all Urban Consumers (C-CPI-U) to make automatic cost-of-living adjustments
(COLAs) to federal programs.4 He pointed out that, at that time, if the C-CPI-U had been used
instead of the CPI-U and CPI-W over the previous 10 years, the federal debt would have been
about $200 billion less.
More recently, the “Simpson-Bowles” (National Commission on Fiscal Responsibility and
Reform) report and the “Gang of Six” plan among others included replacing the standard CPI
with the C-CPI-U for all government provisions subject to indexation.5 This proposal was
considered, as well, by some members of the “super committee” created by the Budget Control
Act of 2011 (P.L. 112-25).6
An amendment offered by Representatives Cooper and LaTourette as a substitute to the House’s
FY2013 budget resolution would have relied on the recommendations in the Simpson-Bowles

1 The CPI-W is derived from the average spending of households on about 80,000 items in 87 urban areas for whom at
least one-half of household income comes from wage earners in clerical, craft, and service among other occupations
with at least one worker employed for 37 or more weeks in an eligible occupation. It covers about 32% of the U.S.
population. The current CPI-W population dates to 1964, when it started including nonfamily (i.e., single-person and
unrelated-individuals) households.
2 The CPI-U is derived from the average expenditures of households beyond those in the CPI-W population. It includes
salaried workers (e.g., professionals and managers), part-time and part-year workers, the self-employed, the
unemployed, and households with no one in the labor force (e.g., retirees). The CPI-U covers about 87% of the U.S.
population. Publication of the CPI-U began in 1978.
3 In addition to adjusting income tax brackets, other provisions in the individual tax code that are adjusted by the CPI-U
(U.S. city average, all items) include the standard deduction, personal exemption, and Earned Income Tax Credit
among other credits. In addition to Social Security retirement benefits, federal programs adjusted by the CPI-W (U.S.
city average, all items) include federal civilian, military, and railroad pensions; veterans’ benefits; and Supplemental
Security Income. Some other federal programs are adjusted for inflation based on components of the CPI. For more
information see CRS Report R42000, Inflation-Indexing Elements in Federal Entitlement Programs, coordinated by
Dawn Nuschler.
4 Testimony of Alan Greenspan before the Committee on the Budget, U.S. House of Representatives, February 25,
2004, available at http://www.federalreserve.gov/boarddocs/testimony/2004/20040225/default.htm.
5 Adam Rosenberg and Marc Goldwein, Measuring Up: the Case for the Chained CPI, Moment of Truth Project,
Washington, DC, May 11, 2011.
6 Jennifer Steinhauer and Robert Pear, “G.O.P. Is Optimistic but Democrats Are Glum on Deficit Panel,” The New York
Times
, November 15, 2011.
Congressional Research Service
1
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net

The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?

report to establish the following year’s budget.7 Although the bipartisan amendment failed on
March 28, 2012, its being offered suggests that interest in changing to the C-CPI-U to curb the
growth of the budget deficit remains among some Members of Congress.8
One reason besides slowing the growth in the budget deficit for changing to the C-CPI-U is that
the standard CPI has not been without criticism as a measure of change in the cost of living. A
true cost-of-living index would measure the change in income required for consumers to maintain
a constant level of “utility” (satisfaction). But there are a number of practical complications that
make constructing such an index difficult.
With a given level of income that constrains their choices, consumers decide how to spend their
money based on the satisfaction the various available goods and services yield. Consumers are
assumed to spend their income in such a way as to get the most satisfaction possible within the
limitations of their budget. Any indicator of the cost of living must be based on what consumers
actually spend because utility cannot be directly measured.
One of the difficulties in estimating changes in the cost of living is that consumer spending
patterns change continuously and for different reasons. Spending patterns change because of
changing tastes and preferences (e.g., for meals in restaurants rather than meals prepared at
home). Spending patterns also change due to changes in relative prices. As prices change over
time, consumers will tend to buy more of those goods and services whose prices are rising slower
than average and fewer of those goods and services whose prices are rising faster than average.
So-called substitution bias causes the standard CPI to overstate the effect of inflation on
consumer well-being.9
The U.S. Bureau of Labor Statistics (BLS), which produces the standard CPI, has strived to
construct a better measure of changes in the cost of living. Toward that end, it asked the
Committee on National Statistics of the National Research Council (NRC) to convene a panel of
experts to look into the conceptual, measurement, and other statistical issues that arise when
constructing cost-of-living indexes.10 In its 2002 report, the panel endorsed continuing to use the
CPI for tax indexation, which began in 1985 as required by the Economic Recovery Tax Act of
1981.11 It suggested that poverty thresholds (which determine eligibility for government transfer
programs such as Medicaid and food stamps) might be adjusted by a fixed percentage of median
income or consumption of workers, and referenced a 1995 NRC report on measuring poverty that
had suggested thresholds be adjusted by a fixed ratio of the median consumption of necessities
(e.g., food and shelter). The panel expressed support for BLS’s then in-development Chained
Consumer Price Index for all Urban Consumers as a means of more accurately adjusting Social
Security retirement benefits among other federal payments (e.g., military and civil service

7 The amendment numbered 3 is printed in H.Rept. 112-423 to accompany H.Res. 597, the concurrent budget
resolution for FY2013.
8 David Grant, “Why the Simpson-Bowles Budget Defeat Isn't the End of the Line,” The Christian Science Monitor,
March 29, 2012, posted at CSMonitor.com.
9 See, for example, Toward a More Accurate Measure of the Cost of Living, Final Report to the Senate Finance
Committee from the Advisory Commission to Study the Consumer Price Index, December 4, 1996. The publication is
commonly known as the Boskin Report after its chairman.
10 National Research Council, At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes, ed.
Charles Schultze and Christopher Mackie (Washington DC: National Academy Press, 2002).
11 The report was silent on the subject of which CPI to use (that is, whether to continue using the CPI-U or switch to the
chained CPI-U that BLS was developing at that time).
Congressional Research Service
2
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net

The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?

pensions; veterans’ benefits) for real changes in the cost of living.12 But, there are difficulties with
switching to the C-CPI-U despite it more fully accounting for substitution bias and thereby more
accurately reflecting changes in the cost of living.
This report explains methodological and statistical differences between the standard CPI and the
C-CPI-U. It then addresses a key impediment to moving to the C-CPI-U. The report closes with a
discussion of the potential impact of such a switch on the federal budget deficit.
Methodological Differences Between the Standard
CPI and the C-CPI-U

Because the standard CPI is a fixed-weight index, it does not entirely reflect ongoing changes in
buying habits. As the overall level of prices changes, relative prices change as well. Consumers
can to some degree change their spending patterns in response to these prices changes by buying
relatively more of those goods whose prices are rising more slowly.
If these changes in consumer spending patterns have no effect on overall consumer satisfaction,
then a price index based on a fixed market basket of goods and services will overstate the
increase in the cost of a given standard of living. Because the standard CPI does not fully account
for consumers’ ability to insulate themselves from inflation by changing their spending patterns, it
overestimates how much they would need to raise total spending to maintain a constant standard
of living. The C-CPI-U, in contrast, is constructed in such a way as to better account for
substitution bias.
The CPI-U and CPI-W
The standard CPI is a fixed-weight (Laspeyres) price index which measures the change in retail
prices of an unchanging mix of goods and services purchased by consumers. To see how a fixed-
weight index is calculated, consider the simple case of two time periods and two goods. In the
first period, the value of the index is one. The index value in the second period is a function of the
quantities in the first period and the prices in the two periods. It is a weighted sum. The first step
is to calculate, for each good, the ratio of the price in the second period to the price in the first
period. The ratios are then summed using expenditure shares in only the first period as weights.
To see how a fixed-weight price index is calculated, see Box 1.
The standard CPI is, strictly speaking, a modified fixed-weight price index. That is, the market
basket of goods and services is periodically changed to keep it up to date. Until a decade ago,
however, those updates occurred only about once every 10 years. With the release of CPI data for
January 2002, the market basket was updated to reflect spending patterns reported in the
Consumer Expenditure (CE) Survey for the 1999-2000 period. Since then, BLS has updated the

12 Annual cost-of-living adjustments were linked to changes in the CPI in the 1972 amendments to the Social Security
Act. The only CPI available at that time was the CPI-W. The National Research Council did not recommend switching
from the CPI-W to the CPI-U for indexing Social Security payments because the two indexes have changed at about
the same rate over time. It also concluded that there was no rationale for switching from the CPI-W to the experimental
index for the elderly (CPI-E) that Congress had requested the BLS to construct. The CPI-E is discussed in more detail
at the end of this report.
Congressional Research Service
3
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net

The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?

expenditure weights every two years.13 With the release of the January 2010 CPI, the weights
were updated to reflect spending patterns in the 2007-2008 period. Despite this more frequent
updating of the market basket, the standard CPI continues to be subject to the substitution bias
that is inherent in a fixed-weight index.
Box 1. Calculating a Fixed-Weight “Laspeyres” Price Index (IndexL)
pt
To illustrate, consider the formula: IndexL
= ∑ s0
i


[1;t]
i ⎝ 1 ⎠
i
pi
where i refers to the good, t refers to the time period, p refers to the price, and si refers to the expenditure share
for each good in the first period. Consider also the following hypothetical values for prices and quantities:
Beer
Wine
Period
Total Cost
Quantity
Price
Cost
Quantity
Price
Cost
1
10
$4
$40
6
$10
$60
$100
2
12
$2
$24
4
$19
$76
$100
The index for period 1 is 1.000, and the index value for period 2 is:

2⎞ ⎤

19 ⎞ ⎤
Index L =
0 4
.
×
0 6
.

2

⎝⎜
⎥ +
×



4 ⎠⎟ ⎦
⎝⎜

10 ⎠⎟ ⎦
Index L = 1 3
. 40
2
Using expenditure weights from the first period (in the case of beer, the expenditure weight is 40 ÷ 100 = 0.40, and
for wine it is 60 ÷ 100 = 0.60), yields an index value in the second period of 1.340 which indicates a 34.0% increase in
the price of this market basket. As the measure of price change does not take into account that the consumer bought
more beer and less wine because of the change in relative prices, the index does not reflect substitution.
The standard CPI is never revised. This makes it attractive for calculating COLAs. But, even a
small discrepancy between estimated and actual changes in the cost of living each year will be
cumulative over time.
The C-CPI-U
In an effort to better estimate the effect of consumer substitution on the CPI, BLS introduced a
supplemental measure known as the Chained Consumer Price Index for all Urban Consumers
(C-CPI-U). It does not replace either the CPI-W or CPI-U, and has not to date affected any
indexing provisions of federal programs.
The aim of the C-CPI-U is to produce a measure of change in consumer prices that is free of
upper-level substitution bias. Upper-level substitution refers to consumers changing their
spending between broad categories in the market basket (e.g., buying more chicken and less fish
due an increase in the price of fish compared with chicken from one month to the next).14

13 The U.S. Census Bureau conducts the CE Survey for BLS. “Collection and processing the annual data consumes the
greater part of a year, meaning that expenditure data introduced into the CPI at the beginning of year t can pertain to
year t-2 at the latest.... Recognized international best practice calls only for revising expenditure weights at least every
five years, and more frequently if there is high inflation or evidence of rapid changes in consumption patterns.” John S.
Greenless and Elliot Williams, Reconsideration of Weighting and Updating Procedures in the US CPI, U.S. Bureau of
Labor Statistics, Working Paper 431, Washington, DC, October 2009, p. 5.
14 In 1999, BLS began applying a geometric mean formula when creating basic indexes within which goods are
(continued...)
Congressional Research Service
4
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net

The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?

The final release of the C-CPI-U is calculated using a Törnqvist index formula that relies on
consumer expenditure data for the current and prior months as a means of accounting for any
substitution across categories made by consumers in response to changes in relative prices. In
other words, “the final version of the C-CPI-U is based on actual consumer behavior, rather than
assumptions about consumer substitution.”15 BLS estimated that the decrease in cost-of-living
growth due to accounting for upper-level substitution may be 0.3 percentage points. To see how a
Törnqvist price index is calculated, see Box 2.
Box 2. Calculating a “Törnqvist” Price Index (IndexT)
s1 +st
i
i



pt ⎝⎜ 2

⎠⎟
The Törnqvist index formula looks like this: IndexT
i
= ∏ ⎜

[1;t]


p1
i
i
In this case, for each good (i), the price in the second period (in which case pt is simply p2) is divided by the price in
the first period (p1) and the exponent applied to that ratio is the average of the expenditure weights of that good in
the two periods. In this formula, the › symbol indicates that each of the weighted price ratios for the goods in the
market basket are multiplied together. Continuing with the same hypothetical numbers from the previous example
and using the Törnqvist formula gives:
⎛ .40 + .32
⎛ .60 + .68
2 ⎝⎜
2

⎠⎟
19 ⎝⎜
2

⎠⎟
IndexT =

2
⎝⎜ 4⎠⎟
× ⎝⎜ 10⎠⎟
Index T = 1 17
.
5
2
The index value for the second period of 1.175 indicates a 17.5% increase in price, which is less than the 34.0% price
increase of the fixed-weight market basket.
The Törnqvist index requires expenditure data that become available after a long lag time. As a
result, the final C-CPI-U cannot be published concurrently with the standard CPI. But, BLS is
able to publish an initial estimate of the C-CPI-U that coincides with the release of the standard
CPI each month by using a geometric mean formula (discussed immediately below). Every
February, the initial C-CPI-U estimates for all of the months in the previous calendar year are
revised again using a geometric mean formula. The revision is referred to as the “interim” release.
The following February, the final C-CPI-U estimates based on the Törnqvist formula are released
for all of those same months.16

(...continued)
relatively close substitutes to account for lower-level substitution in the standard CPI. Lower-level substitution refers to
consumers changing their spending within narrow categories in the market basket (e.g., buying more Muenster than
Swiss cheese due to a relative increase in the price of Swiss). BLS estimated that the actual decrease in CPI growth due
to use of the geometric mean to calculate most lower level indexes may be 0.28 percentage points per year. (See John
S. Greenlees and Robert B. McClelland, “Addressing Misconceptions About the Consumer Price Index,” Monthly
Labor Review
, August 2008.) BLS uses the geometric mean to create most basic indexes, but there are some
exceptions. The lower level category of hospital services is one. BLS judged that consumers are unlikely to substitute
between the services performed at hospitals in response to relative price changes.
15 David S. Johnson, Stephen B. Reed, and Kenneth J. Stewart, “Price Measurement in the United States: A Decade
After the Boskin Report,” Monthly Labor Review, May 2006, p. 12.
16 The Census Bureau collects expenditure information from paper diaries and interviews of households, which are
based on a three-month recall, and then uploads and codes the information before transmitting it to BLS. The Census
Bureau could not start inputting and processing the expenditure reports for the last three months of 2009 until after they
were received in March 2010, for example. BLS’s CPI Division subsequently receives all the expenditure data from a
given year in September of the following year (e.g., in September 2010 in the case of 2009). Only then is the CPI
(continued...)
Congressional Research Service
5
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net

The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?

The initial and interim releases of the C-CPI-U are based on the same expenditure weights used
for the CPI-U but a geometric mean formula is used in aggregating the basic indexes to create the
upper-level indexes in the initial and interim releases.17 In contrast with the Laspeyres index, in
which the quantities are held constant in both periods, the geometric mean index formula holds
expenditure shares (price times quantity) constant. It assumes a particular consumer response to
the change in relative prices. That means that if the price of a good rises, the quantity consumed
implicitly falls. Some research has suggested that the geometric mean based price index may
overstate substitution bias if consumers are assumed to respond to changes in relative prices more
than they actually do.18 To see how a geometric mean index is calculated, see Box 3.
The initial and interim releases of the C-CPI-U are further adjusted based on historical differences
between geometric mean and Törnqvist indexes. This is done so that the initial and interim
releases are closer to the final index number. BLS is continuing to study methods to further
narrow the gap between preliminary and final index numbers.19 It also is trying to shorten the
lengthy lag between release of preliminary and final index numbers.20
Box 3. Calculating a Geometric Mean Index (IndexG)
1
pt si

The formula for a geometric mean price index looks like this: IndexG
i
= ∏ ⎜

[1;t]
p1
i
i
Using the same prices and quantities as in the previous example with this formula gives:
2
4
⎞ .
19
.6


Index G =
2

4⎠⎟
× ⎝⎜ 10⎠⎟
IndexG = 1 1
. 14
2
The geometric mean approach to calculating the price index for period 2 yields an increase of 11.4% between the two
periods, which is less than either of the other two measures.
Although the C-CPI-U may be superior to the standard CPI in some respects, final data are far
from timely. For example, in the case of the release of C-CPI-U data for the month of January

(...continued)
Division able to edit the expenditure data and calculate final C-CPI-U values for all months in a given year. BLS issues
the final C-CPI-U releases the following February (e.g., in February 2011 in the case of 2009 data received from the
Census Bureau in September 2010). This process was outlined by BLS in phone conversations with CRS in September
2011.
17 As previously noted, BLS has since 1999 used the geometric mean in developing the basic indexes of the standard
CPI. It is not used it in their aggregation.
18 See Matthew D. Shapiro and David W. Wilcox, “Alternative Strategies for Aggregating Prices in the CPI,” Federal
Reserve Bank of St. Louis Review, May/June 1997.
19 For additional methodological information on the standard CPI and C-CPI-U see the chapter on the CPI in the BLS
Handbook of Methods, updated June 2007 (http://www.bls.gov/opub/hom/pdf/homch17.pdf); and for the C-CPI-U in
particular see Robert Cage, John Greenlees, and Patrick Jackman, Introducing the Chained Consumer Price Index,
paper presented at the Seventh Meeting of the International Working Group on Price Indexes, Paris, FR, May 2003, and
Frequently Asked Questions on the Chained Consumer Price Index for All Urban Consumers, http://www.bls.gov/cpi/
cpisupqa.htm.
20 Rather than receiving expenditure data from the Census Bureau in September for the entire preceding calendar year,
BLS’s CPI Division plans to get data on a rolling quarterly basis. This will permit revision of three months of index
values every quarter. BLS expects to be able to shorten the lag times between initial and final C-CPI-U releases, shown
in Table 1, by several months once a new computer system is completed—perhaps in summer 2014—according to
phone conversations between BLS and CRS conducted in September 2011.
Congressional Research Service
6
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net

The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?

2009, the initial release occurred in February 2009, the interim release occurred in February 2010,
and final release in February 2011. Final data for all of the months in calendar 2009 also were not
released until February 2011. Thus, the wait for the final release of any January C-CPI-U is 25
months. But, because all of the months in a given calendar year are revised at the same time, the
wait for the final release of any December C-CPI-U is 14 months. (See Table 1 for how many
months after the reference month, the month for which the data are reported, the various releases
are published.)
Table 1. Number of Months After Reference Month That Data Are Released
C-CPI-U
Reference
Month CPI-U/W
Initial Release
Interim Release
Final Release
January 1
1
13
25
February 1 1 12
24
March 1
1
11
23
April 1
1
10
22
May 1
1
9
21
June 1
1
8
20
July 1
1
7
19
August 1
1
6
18
September 1 1 5 17
October 1 1 4 16
November 1 1 3 15
December 1 1 2 14
Source: U.S. Bureau of Labor Statistics, CPI news releases.
Statistical Differences Between the CPI
and C-CPI-U

Data for the C-CPI-U are available beginning with December 1999. As shown in Table 2, which
uses final data through the end of 2009 and interim data through the end of 2010, most of the time
the increase in the final C-CPI-U has been smaller than the increase in the standard CPI.
Table 2. The C-CPI-U, the CPI-U, and the CPI-W
Percentage Change
12-Month Period
Ending in
C-CPI-U
December of:
Initial Interim Final CPI-U CPI-W
2000
n.a. n.a. 2.6 3.4 3.4
2001
n.a. n.a. 1.3 1.6 1.3
2002
n.a. 2.3 2.0 2.4 2.4
Congressional Research Service
7
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net

The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?

Percentage Change
12-Month Period
Ending in
C-CPI-U
December of:
Initial Interim Final CPI-U CPI-W
2003
1.6 1.5 1.7 1.9 1.6
2004
3.0 3.1 3.2 3.3 3.4
2005
3.0 3.2 2.9 3.4 3.5
2006
2.7 2.4 2.3 2.5 2.4
2007
3.4 3.6 3.7 4.1 4.3
2008 -0.4
-0.6
0.2
0.1
-0.5
2009
2.7 3.8 2.5 2.7 3.4
2010
1.4 1.4 n.a. 1.5 1.7
Source: U.S. Bureau of Labor Statistics, not seasonally adjusted CPI data.
Note: n.a. = not available.
The short history of the C-CPI-U makes it difficult to say with confidence how large differences
between the final and preliminary indexes are likely to be. In two years, the change between
interim and final releases was 0.3 percentage point, a significant revision. The initial estimate for
2006 indicated a larger increase in the cost of living than either the CPI-U or CPI-W, but the final
estimate was revised downward by 0.4 percentage point, which produced an increase in the C-
CPI-U that was smaller than the increase in the standard CPI. The interim release for 2009
indicated a larger increase in the cost of living than either the CPI-U or CPI-W, but the final
estimate was revised downward by 1.3 percentage points, which produced an increase in the C-
CPI-U that was smaller than the increase in the standard CPI. As shown in Figure 1, most other
revisions to the C-CPI-U have been small.
Figure 1. The CPI-U and the C-CPI-U
135
CPI-U
130
CPI-U
Initial C-CPI-U
0) 125
Interim C-CPI-U
10
=

Final C-CPI-U
120
1999
c.
115
e
D
x (
110
e
d
In
105
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Created by CRS from U.S. Bureau of Labor Statistics’ CPI data.
Congressional Research Service
8
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net

The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?

Policy Considerations
The CPI is important, not only as an economic indicator, but also because it has significant
implications for the budget through the indexing of some tax provisions and federal programs. If
the CPI overstates the effect of inflation on consumers, then Social Security benefits are rising
more rapidly than necessary to preserve the living standards of beneficiaries, more people are
eligible for some federal programs, and income tax brackets are rising more than necessary to
avoid “bracket creep.”21
If the C-CPI-U is a better measure of changes in the cost of living, and the goal of indexing is
strictly to reflect changes in the cost of living, then the C-CPI-U might be considered as a
measure on which to base those adjustments. As previously discussed, however, a major
complication of switching to the C-CPI-U is that final data are not available for up to two years
after the reference period. The Social Security cost-of-living adjustment (COLA) payable in
January 2011 was based on the average percentage increase between third quarter 2010 and 2008
CPI data (because 2008 was the last year in which a COLA was effective).22 Final C-CPI-U data
for the third quarter of 2010 were not available until February 2012, however. Such a long time
lag might make the final C-CPI-U number a poor candidate as an index for automatic
adjustments.
Preliminary C-CPI-U estimates might be an attractive alternative to using the final C-CPI-U. If
there is a tendency for the final index to rise more than the initial or interim indexes, it might
make the preliminary indexes unpopular with those who would be affected. More specifically,
basing future COLAs on any version of the C-CPI-U could generate opposition from some Social
Security beneficiaries, taxpayers, and those whose eligibility for federal programs is based on
poverty thresholds because the index has tended to rise less than either the CPI-U or the CPI-W
as they are now calculated.
The elderly and their advocates were among those who expressed opposition to changing the
current basis for indexation when this was reportedly considered by some members of the super
committee.23 If the prices Social Security beneficiaries and federal and military pensioners face
increase at an above-average rate, switching to the C-CPI-U might not enable this population to
maintain its standard of living. The elderly spend more than the population at large on health care,
and prices for these services generally have increased at an above-average rate.24 An experimental
fixed-weight index for those aged 62 and older (CPI-E) computed by BLS has increased 0.27
percentage points faster than the CPI-W from the CPI-E’s inception in December 1982 to
December 2010. However, it is difficult to gauge whether the cost of living among the elderly
actually increases more quickly than among younger persons due to rising health care prices
because BLS may underestimate the rate of improvement in the quality of these services. If this is

21 With progressive tax rates, as incomes rise with inflation, more income is subject to higher tax rates. If the CPI-U
overstates inflation, then the tax brackets are rising more than they need to in order to avoid increasing taxes on
incomes that are simply keeping up with rising prices.
22 Because there was no increase in the CPI-W, Social Security recipients did not receive a COLA in 2011.
23 Merrill Goozner, “Senior Backlash Builds on Social Security Cuts,” The Fiscal Times, November 14, 2011.
24 For more information see CRS Report RS20060, A Separate Consumer Price Index for the Elderly?.
Congressional Research Service
9
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net



























Learn how Capitol
Legislative Series
Legislative
Drafter’s Deskbook
Hill really works
A Practical Guide
By Tobias A. Dorsey
All of our programs and any combination of their topics
GOVERNMENT SERIES
can be tailored for on-site training for your organization.
The Federal
Budget
Process
For more than 30 years, TheCapitol.Net and its predecessor, Congressional Quarterly Executive
A Description of the Federal and
Congressional Budget Processes,
Including Timelines
Conferences, have been training professionals from government, military, business, and NGOs on
the dynamics and operations of the legislative and executive branches and how to work with them.
Our training and publications include congressional operations, legislative and budget process,
communication and advocacy, media and public relations, research, testifying before Congress,
legislative drafting, critical thinking and writing, and more.
A Practical Guide to Preparing and Delivering
Testimony Before Congress and Congressional

• Diverse Client Base
Hearings for Agencies, Associations, Corporations,
—We have tailored hundreds of custom on-site training programs
Military, NGOs, and State and Local Officials
By William N. LaForge
for Congress, numerous agencies in all federal departments, the military, law firms,
lobbying firms, unions, think tanks and NGOs, foreign delegations, associations and
corporations, delivering exceptional insight into how Washington works.TM
Testifying
• Experienced Program Design and Delivery—We have designed and delivered
Before
hundreds of custom programs covering congressional/legislative operations, budget
Congress
process, media training, writing skills, legislative drafting, advocacy, research,
testifying before Congress, grassroots, and more.
• Professional Materials—We provide training materials and publications that show
how Washington works. Our publications are designed both as course materials
and as invaluable reference tools.
• Large Team of Experienced Faculty—More than 150 faculty members provide
independent subject matter expertise. Each program is designed using the best
Congressional
Directory
faculty member for each session.
Includes Capitol Hill and District maps
• Non-Partisan—TheCapitol.Net is non-partisan.
• GSA Schedule—TheCapitol.Net is on the GSA Schedule,
We help you understand Washington and Congress.™
www.TheCapitol.Net
874-4, for custom on-site training: GSA Contract GS02F0192X.
Winning Strategies, Recommendations,
We help your staff, members, and executives better understand Washington and Congress.
Resources, Ethics and Ongoing Compliance
TM
for Lobbyists and Washington Advocates:
The Best of Everything Lobbying

and Washington Advocacy
Please see our Capability Statement on our web site at TCNCS.com.
Lobbying
Custom training programs are designed to meet your educational and training goals, each
and
led by independent subject-matter experts best qualified to help you reach your educational
Advocacy
objectives and align with your audience.
Deanna R. Gelak
As part of your custom program, we can also provide classroom space, breaks and meals,
receptions, tours, and online registration and individual attendee billing services.
For more information about custom on-site training for your organization,
A Practical Guide to Parlaying an Understanding of Congressional
please see our web site: TCNCustom.com or call us: 703-739-3790, ext 115.
Folkways and Dynamics into Successful Advocacy on Capitol Hill
How to Spend
Less and Get More
from Congress:
Candid Advice
for Executives
By Joseph Gibson

Persuading
PO Box 25706, Alexandria, VA 22313-5706
Congress
www.TheCapitol.Net 703-739-3790

The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?

the case then all versions of the CPI—but especially the CPI-E—overstate increases in the cost of
living.25
In its regularly issued report on spending and revenue options to reduce the deficit, the U.S.
Congressional Budget Office (CBO) includes estimates of the effects on the budget if
policymakers substitute the C-CPI-U for the standard CPI.26 The estimates assume that, in the
future, the C-CPI-U will increase 0.25% more slowly each year between 2012 and 2021 than the
CPI that is now used for indexation. Using preliminary estimates of the C-CPI-U as described in a
technical appendix to Using a Different Measure of Inflation for Indexing Federal Programs and
the Tax Code
,27 CBO projected that a switch from the CPI-U to the C-CPI-U could yield a
cumulative increase in revenues between 2010 and 2021 of $71.8 billion in the case of indexation
of various provisions of the tax code.28 In the case of Social Security COLAs, CBO projected that
a switch from the CPI-W to the C-CPI-U would result in a cumulative decline in outlays of
$112.0 billion between 2012 and 2021. In the case of COLAs for federal and military pensions,
switching the index could result in a cumulative decline in outlays of $24.0 billion between 2012
and 2021.

Author Contact Information

Julie M. Whittaker

Specialist in Income Security
jwhittaker@crs.loc.gov, 7-2587

Acknowledgments
This report was written by former CRS Analyst Linda Levine.


25 U.S. Congressional Budget Office, Using a Different Measure of Inflation for Indexing Federal Programs and the
Tax Code
, Economic and Budget Issue Brief, Washington, DC, February 24, 2010.
26 U.S. Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options, Washington, DC, March
2011.
27 See http://www.cbo.gov/ftpdocs/112xx/doc11256/WebAppendix.pdf.
28 They include the amounts of the personal and dependent exemptions as well as the standard deductions; the levels of
incomes that separate individual income tax brackets from one another; the amount of the annual gift tax exemption;
and the income thresholds and phaseouts for the earned income tax credit and the child tax credit among other credits.
Congressional Research Service
10
TheCapitol.Net – Teaching how Washington and Congress work.TM 202-678-1600 www.thecapitol.net