One of the least discussed, but potentially most significant, provisions in
President Obama's budget is the use of the "chained consumer price index" (chained
CPI), to measure the effect of inflation on people's standard of living. Chained
CPI is an effort to alter the perceived impact of inflation via the gimmick
of "full substitution." This is the assumption that when the price of one consumer
product increases, consumers will simply substitute a similar, lower-cost product
with no adverse effect. Thus, the government decides your standard of living
is not affected if you can no longer afford to eat steak, as long as you can
afford to eat hamburger.
The problem with "full substitution" should be obvious to anyone not on the
government payroll. Since consumers did not choose to buy lower-priced beef
before inflation raised the price of steak, they obviously preferred steak.
So if the Federal Reserve's policies create inflation that forces you to purchase
hamburger instead of steak, your standard of living is lowered. CPI already
uses this sort of substitution to mask the costs of inflation, but chained
CPI uses those substitutions more frequently, thereby lowering the reported
rate of inflation.
Supporters of chained CPI also argue that the government should take into
account technology and other advances that enhance the quality of the products
we buy. By this theory, increasing prices signal an increase in our standard
of living! While it is certainly true that advances in technology improve our
standard of living, it is also true that, left undisturbed, market processes
tend to lowerthe prices of goods. Remember the mobile phones from the 1980s?
They had limited service, constantly needed charging, and were extremely expensive.
Today, almost all Americans can easily afford a mobile device to make and receive
calls, texts, and e-mails, as well as use the Internet, watch movies, read
books, and more.
The same process occurred with personal computers, cars, and numerous other
products. If left alone, the operations of the market place will deliver higher
quality and lower prices. It is only when the government interferes with the
operation of the market, especially via fiat money, that consumers must contend
with constant price increases.
The goal of chained CPI is to decrease the government's obligation to meet
its promise to keep up with the cost of living in programs like Social Security.
But it does not prevent individuals who have a nominal increase in income from
being pushed into a higher income bracket. Both are achieved without a vote
of Congress.
Noted financial analyst Peter Schiff correctly calls chained CPI a measurement
of the cost of survival. Instead of using inflation statistics as a political
ploy to raise taxes and artificially cut spending, the President and Congress
should use a measurement that actually captures the eroding standard of living
caused by the Federal Reserve's inflationary policies. Changing government
statistics to exploit the decline in the American way of life and benefit big
spending politicians and their cronies in the big banks does nothing but harm
the American people.
