Inflation (13.3 percent!) hurts less if you measure it right
The news out of Washington is that 1979's inflation rate was a shocking 13.3 percent, the worst since wartime price controls were lifted in 1946. President Carter's chief inflation fighter, Alfred Kahn, warned that he saw no letup in the wage-price spiral anytime soon. Nevertheless, he told congressmen that the situation is not as bad as it seems. He noted that the consumer price index, the official inflation measure, exaggerates the problem and paints a bleaker picture of how increasing prices affect the average American than is actually the case.
Lest anyone think this is just another case of someone trying to minimize a problem that thus far seems to have defied solution, it should be noted that many economists have, in fact, for some time questioned the accuracy of the CPI as an inflation gauge. The Commissioner of Labor Statistics, Janet Norwood, defends the index as "the best measure of purchasing power we have," and she pledges, "We will continue to have one official CPI." Yet government economists recognize the index has shortcomings, and the Bureau of Labor Statistics also publishes monthly five experimental measures of consumer inflation which, officials hope, will foster greater public understanding of what the CPI does and does not do.
Whether the CPI is the best possible inflation index is no trifling question. The incomes of a quarter of the US population are in some way tied to the CPI. Union wages and pension contracts with their cost-of-living escalators, are based on the government's inflation calculations, as are social security and a number of other government programs. One estimate is that 40 percent of federal spending is linked to changes in the CPI.
The major criticisms of the CPI are that it exaggerates the costs of housing for many Americans in that its figures do not adequately reflect the fact that most people do not buy a new home each month. Although the prices of new houses continue to skyrocket, most people are paying monthly notes on mortgages they have held for some time. The CPI shows the cost of buying a house, it is argued , rather than the cost of living in one.
One suggestion is that housing prices should be handled separately. The experimental measures try to cope with housing in various ways. One, for instance, estimates what it would cost a family to rent their house. But if housing prices are given special treatment, the question, then, is: what about appliances, cars, and other consumer purchases that are not made monthly or even yearly? Should they by handled differently?
Other arguments frequently raised about the current index is that its "fixed market basket" of goods and services is based on past spending habits, rather than current ones. Some critics, for example, note that reduced spending on gasoline and energy needs to be given more emphasis. Others fault the CPI for not accurately taking into account improvements or deterioration in the quality of automobiles and other products characterized by built-in obsolescence.
Changes in the consumer price index do not come easily. Commissioner Norwood opposes any "quick fix" for the index but thinks its problems should be reviewed until some as yet unscheduled study of the government inflation yardstick is made. A greater sense of urgency is called for than that. The CPI's exaggerated figures unduly feed the public anticipation of ever higher prices, thereby making even more difficult the problem of bringing wages and prices under control. Individual Americans, of course, can still resist the herd instinct and practice individual restraint by accepting wage hikes within President Carter's guidelines. The government could help by taking speedy action to devise a more reliable inflation measure. Even better, it could do an improved job of controlling inflation.