The Cost of Living: A New Myth

Toward a More Accurate Measure of the Cost of Living Commission to Study the Consumer Price Index

Final Report to the Senate Finance Committee from the Advisory
94 pp.

Bias in the Consumer Price Index: What is the Evidence?

by Brent R. Moulton. Journal of Economic Perspectives

American Standards of Living, 1918-1988

by Clair Brown
Blackwell, 489 pp., $39.95

Getting Prices Right: A Methodologically Consistent Consumer Price Index, 1953-94

by Dean Baker
Economic Policy Institute, plus appendices pp., $10.00

When the Advisory Commission to Study the Consumer Price Index released its report in early December claiming that consumer inflation is being overstated by 1.1 percent a year, its findings were generally treated by the press as if they were technically irreproachable. The Boskin Commission, appointed by the Senate Finance Committee and named after its chairman, Michael Boskin, President Bush’s chairman of the Council of Economic Advisers, was repeatedly described as “blue-ribbon,” “distinguished,” and “bipartisan.” The report was said to have met the highest academic standards. Many people I spoke to, including economists, took it for granted that the Commission was at least approximately right, and recently Alan Greenspan, the Federal Reserve chairman, spoke approvingly of its conclusions. All agreed that the consequences were enormous. To take one example: because the payments for many federal programs, the largest of which is Social Security, are linked to the Consumer Price Index (CPI), it would cost the government an unnecessary $1 trillion in additional spending between now and 2008 if the CPI were indeed overstated by 1.1 percent.

But without working directly on the problem of consumer prices, even the most thoughtful economists, not to mention members of the financial press, may not be able to appreciate fully the labyrinthine complexity of the CPI. In fact, the Boskin Commission’s conclusions are based on a high degree of conjecture and speculation, as I believe most interested observers would conclude if they actually read the ninety-page report. The Commission conducted little original research and much of the evidence it cites is old or covers only limited periods of time. Even a strong supporter of the Commission’s work, William Nordhaus, professor of economics at Yale, warned at the recent convention of the American Economics Association in New Orleans that some of the most important of the Commission’s conclusions are “highly subjective.” The adjustments in the index for the price for food, according to Nordhaus, “have no quantitative support; housing is a guess; and medical care is based on a few preliminary studies comprising a tiny fraction of the expenditures.” A member of the commission, Harvard professor Zvi Griliches, was quoted in a New York Times article as conceding that the numbers are “squishy.”

The CPI is the nation’s main measure of consumer inflation. The Bureau of Labor Statistics (BLS), which compiles the CPI, tracks the prices of about 80,000 goods and services each month in seven major groups, such as food, clothing, and medical care, and the rents of about 5,000 apartment units. It calculates the relative amounts consumers spend in each of these categories, and the overall average is turned into an index in which 100 is equivalent to the average of prices in the period 1982-1984. The change from year to year in this index is consumer inflation. In 1996, the CPI rose to 158.6, a rise of 3.3 percent from the previous year. If the Boskin Commission is right …

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Letters

The Cost of Living: An Exchange June 26, 1997