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
May 8, 2013
Congressional Research Service
7-5700
www.crs.gov
RL32293
CRS Report for Congress
Pr
epared for Members and Committees of Congress
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). (Hereinafter in this report, the CPI-W and CPI-U
will be referred to collectively as the standard CPI.) The standard CPI might seem like just
another economic indicator, but it is 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 adjustments could substantially affect outlays and revenues.
Since August 2002, BLS has published 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. In April 2013, a modified version of the Chained CPI-U proposal was included
in President Obama’s Fiscal Year 2014 Budget.
The CPI-W and CPI-U are not final upon being issued, making them attractive for use in
calculating cost-of-living adjustments. In comparison, 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.
This report provides technical and logistical information on how the C-CPI-U is constructed and
reported by the BLS. For information on programs indexed to the CPI, see CRS Report R42000,
Inflation-Indexing Elements in Federal Entitlement Programs, coordinated by Dawn Nuschler.
For information on how Social Security benefits could be affected by using the Chained CPI-U to
compute annual COLAs, see CRS Report R42086, Using a Different Cost-of-Living Measure for
Social Security Beneficiaries: Some Policy Considerations, by Christine Scott.
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The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?
Contents
Introduction ...................................................................................................................................... 5
Methodological Differences Between the Standard CPI and the C-CPI-U ..................................... 7
The CPI-U and CPI-W .............................................................................................................. 8
The C-CPI-U ............................................................................................................................. 9
Statistical Differences Between the CPI and C-CPI-U .................................................................. 12
Policy Considerations .................................................................................................................... 14
Figures
Figure 1. The CPI-U and the C-CPI-U .......................................................................................... 14
Tables
Table 1. Number of Months After Reference Month That Data Are Released .............................. 12
Table 2. The C-CPI-U, the CPI-U, and the CPI-W ........................................................................ 12
Contacts
Author Contact Information........................................................................................................... 16
Acknowledgments ......................................................................................................................... 16
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The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?
Introduction
This report provides technical and logistical information on how the Chained Consumer Price
Index for all Urban Consumers (C-CPI-U) is constructed and reported by the U.S. Bureau of
Labor Statistics (BLS). It explains methodological and statistical differences between the standard
Consumer Price Index (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. For information on programs indexed to the CPI, see CRS Report R42000,
Inflation-Indexing Elements in Federal Entitlement Programs, coordinated by Dawn Nuschler.
For information on how Social Security benefits could be affected by using the C-CPI-U to
compute annual cost-of-living adjustments (COLAs), see CRS Report R42086, Using a Different
Cost-of-Living Measure for Social Security Beneficiaries: Some Policy Considerations, by
Christine Scott.
The 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 C-
CPI-U to make automatic 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.
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.
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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
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
In April 2013, a modified version of the Chained CPI-U proposal was included in President
Obama’s Fiscal Year 2014 Budget.9
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.10
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.
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 The President’s Budget would apply the change only to non-means-tested benefit programs and to parameters of the
tax code. See Fiscal Year 2014 Budget of the U.S. Government, page 46, http://www.whitehouse.gov/sites/default/files/
omb/budget/fy2014/assets/budget.pdf.
10 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.
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The 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.11 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 1981.12 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 pensions; veterans’ benefits) for
real changes in the cost of living.13 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.
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.
11 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).
12 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).
13 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.
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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
expenditure weights every two years.14 For example, 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.
14 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.
Greenlees 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.
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Box 1. Calculating a Fixed-Weight “Laspeyres” Price Index (IndexL)
t
⎛
⎞
L
1
p
To illustrate, consider the formula: Index
= ∑ s
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).15
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
15 In 1999, BLS began applying a geometric mean formula when creating basic indexes within which goods are
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.
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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.”16 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 + .24 ⎞
⎛ .60 + .76 ⎞
⎝⎜
⎠⎟
⎝⎜
⎠⎟
T
2
2
⎞
19
2
⎞
Index
= ⎛
2
⎝
⎜ 4⎠⎟
× ⎛
⎝
⎜ 10⎠⎟
Index T ≈ 1.239
2
The index value for the second period of 1.239 indicates a 23.9% 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.17
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.18 In contrast with the Laspeyres index, in
which the quantities are held constant in both periods, the geometric mean index formula holds
16 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.
17 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
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.
18 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 the aggregation to all-items CPI.
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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.19 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.20 It also is trying to shorten the
lengthy lag between release of preliminary and final index numbers.21
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
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.)
19 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.
20 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.
21 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.
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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 2011 and interim data through the end of 2012, 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
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
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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
2010
1.4 1.4 1.3 1.5 1.7
2011
2.8 2.7 2.9 3.0 3.2
2012
1.6 1.6 N.A. 1.7 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 different 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.
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The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?
Figure 1. The CPI-U and the C-CPI-U
140
Initial C-CPI-U
135
Interim C-CPI-U
Final C-CPI-U
130
CPI-U
125
1999=100)
r
be 120
ecem
115
x (D
Inde 110
105
100 20
20
20
20
20
20
20
20
20
20
20
20
20
20
00
01
02
03
04
05
06
07
08
09
10
11
12
13
Source: CRS figure created from data provided by U.S. Bureau of Labor Statistics, Consumer Price Index
Detailed Report Tables, “Table 24. Historical Consumer Price Index for All Urban Consumers (CPI-U): U. S. city
average, all items” and “Table 24C. Historical Chained Consumer Price Index for Al Urban Consumers (C-CPI-
U): U.S. city average, all items),” Washington, DC, various years, http://www.bls.gov/cpi/cpi_dr.htm.
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.”22
22 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.
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The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?
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).23 Final C-CPI-U data
for the third quarter of 2010 were not available until February 2012, however. Such 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.24 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.25 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
the case then all versions of the CPI—but especially the CPI-E—overstate increases in the cost of
living.26
The U.S. Congressional Budget Office (CBO) has estimated the effects on the budget if
policymakers substitute the C-CPI-U for the standard CPI.27 The estimates assume that, in the
future, the C-CPI-U will increase 0.25% more slowly each year between 2014 and 2023 than the
CPI that is now used for indexation. Using projections of the C-CPI-U, CBO projected that a
switch from the CPI-U to the C-CPI-U could yield a cumulative increase in revenues between
FY2014 and FY2023 of $123.7 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
23 Because there was no increase in the CPI-W, Social Security recipients did not receive a COLA in 2011.
24 Merrill Goozner, “Senior Backlash Builds on Social Security Cuts,” The Fiscal Times, November 14, 2011.
25 For more information see CRS Report RS20060, A Separate Consumer Price Index for the Elderly?.
26 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.
27 Congressional Budget Office, Preliminary Estimate of the Budgetary Effects of Using the Chained CPI for
Mandatory Programs and the Tax Code Starting in 2014, Washington, DC, March 1, 2013, http://www.cbo.gov/
publication/43965.
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;
(continued...)
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The Chained Consumer Price Index: What Is It and Would It Be Appropriate for COLAs?
C-CPI-U would result in a cumulative decline in outlays of $127.2 billion between FY2014 and
FY2023. In the case of COLAs for federal and military pensions, switching the index could result
in a cumulative decline in outlays of $37.5 billion between FY2014 and FY2024.
Author Contact Information
Julie M. Whittaker
Specialist in Income Security
jwhittaker@crs.loc.gov, 7-2587
Acknowledgments
Former CRS Analyst Brian Cashell originally wrote this report.
(...continued)
and the income thresholds and phaseouts for the earned income tax credit and the child tax credit among other credits.
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