CPI change is hurting retirees
The Labor Department this year changed its main consumer price gauge, the Consumer Price Index, and that change eventually will knock a couple of tenths of a percentage point off the official annual rate of inflation. Unfortunately, that means federal and private-sector retirees, whose pensions are tied to the CPI, will experience a reduction in future cost-of-living-adjustment (COLA) increases. This also will affect the indexing of income tax brackets - to the detriment of all taxpayers.
Labor explained that it is switching to a "geometric mean'' formula for calculating the CPI - a measure that it claims will more accurately consider consumers' buying habits. The change already has had an impact on the January CPI figures. They registered a one-tenth of a percent inflation increase instead of the expected two-tenths of a percent increase expected by economists.
The White House's Council of Economic Advisers (CEA) estimated that the new formula is expected to shave two-tenths of a percentage point off the CPI annually, once a full year's data has been built up.
Although economists at Labor's Bureau of Labor Statistics said the change will not have a great impact on the economy, I believe it will reduce the immediate buying power of retired federal employees and have a cumulatively adverse impact that will become substantial over time.
And don't forget that Social Security COLAs also are tied to the CPI. For federal retirees in the Federal Employees Retirement System who eventually will receive Social Security benefits, this amounts to a double whammy.
The change is supposed to reflect more accurately consumers' tendency to insulate themselves from inflation by switching to lower-priced goods. My problem with this adjustment is that it distorts what is happening to consumer prices.
For example, let's say you go to the supermarket for a bottle of brand-name ketchup, and you discover that the price has gone up. If you want to buy the generic brand to save money, no one is stopping you. But if you want the brand-name ketchup because it's better, your cost for ketchup is going up, right? Not according to Labor. If you can buy generic ketchup this month for less than the price charged for brand-name ketchup last month, Labor won't record the price increase for brand-name ketchup. The agency might even register that as a price decrease!
One of the few elements of the CPI that has been rising strongly lately has been tobacco prices. Those prices rose by 18.3 percent in December 1998 alone, but they could come back down later this year. Maybe the new formula for calculating the CPI eventually will assume that consumers will stop smoking because cigarettes cost too much. Will that register as another decline in the CPI?
It is true that overseas financial crises have driven down the prices of important commodities such as oil. Other countries are practically giving away their products to bolster their economies, and that's keeping the CPI down. But this situation isn't going to last forever. When these economies recover, they'll increase their prices. I doubt the new CPI will accurately reflect those increases.
The geometric mean comes on top of several other changes Labor has been making to the CPI since 1995. The CEA admits that, taken together, the changes made so far have reduced the CPI's annual growth rate by almost three-quarters of a percentage point.
Government tampering with the CPI is just plain wrong. It cheats retirees and others receiving benefits tied to the CPI. It's bad enough that the White House hasn't honored its commitment to bring federal salaries into line with private-sector salaries. I guess the government wants to rob you when you're retired too.
--Bureaucratus is a retired federal employee who contributes regularly to Federal Computer Week.