Wednesday, February 12, 2014

Comparing the traditional and chained CPI.

Situation:  President Obama has advocated basing the Social Security COLA on the chained CPI rather than the traditional CPI.   One goal of this change is to reduce costs associated with Social Security and other means tested benefit programs.   Recently, the staff of the House Ways and Means Committee has asserted that a change from the traditional to chained CPI would increase Social Security benefit payments in 2014.



Question:  Is there a stable relationship between the traditional and chained CPI? On average would a change from the traditional to chained CPI increase or decrease Social Security benefit

Data:   Data on the CPI, traditional versus chained, can be obtained from the BLS web site.


Use CPI figures for all items.

The traditional CPI is obtained on the top row.   The chained CPI is obtained from the third row.  This database only contains data on the chained CPI from 1999 on.  Hence, the study is based on a limited time series. 


Analysis: 

The CPI figures and inflation figures (December to December) for the traditional and chained CPI are presented in the first table below.


Comparing inflation from the traditional versus chained CPI
Year
Traditional CPI
Chained CPI
Annual Inflation Traditional CPI
Annual Inflation Chained CPI
Difference
1999
166.6
100.0
2000
172.2
102.6
3.36%
2.60%
0.0076
2001
177.1
103.9
2.85%
1.27%
0.0158
2002
179.9
106.0
1.58%
2.02%
-0.0044
2003
184.0
107.8
2.28%
1.70%
0.0058
2004
188.9
111.2
2.66%
3.15%
-0.0049
2005
195.3
114.4
3.39%
2.88%
0.0051
2006
201.6
117.0
3.23%
2.27%
0.0095
2007
207.3
121.3
2.85%
3.67%
-0.0082
2008
215.3
121.6
3.84%
0.22%
0.0362
2009
214.5
124.5
-0.36%
2.46%
-0.0281
2010
218.1
126.1
1.64%
1.28%
0.0036
2011
224.9
129.8
3.16%
2.93%
0.0022
2012
229.6
131.9
2.07%
1.58%
0.0049
2013
233.0
133.7
1.46%
1.34%
0.0013


The relationship between the traditional and chained CPI does not appear to be particularly stable.  Inflation was larger for the traditional CPI than the chained CPI in 9 of the 14 years covered in this table.  The relationship between traditional and chained CPI was very strange in 2008 and 2009.


It is instructive to look at the total changes for the traditional and chained CPI between 1999 and 2013.    See table below.


Traditional CPI
Chained CPI
Difference
% Change December 1999 to December 2013
39.8%
33.7%
6.2%
Average Annual Change 1999 to 2013
2.42%
2.09%
0.33%


Over the 1999 to 2013 period a COLA based on the traditional CPI would have been more generous than a COLA based on the chained CPI.   The average annual difference is around 0.33 % or 0.0033 percentage points. 

In my view, it would be sensible to use an estimate of the traditional CPI inflation of 2.42% and an estimate of the chained CPI inflation of 2.09% when evaluating the financial effects of a change in the COLA.  However, a larger difference in the two measures would be appropriate in a higher inflation scenario. 

The dispute over the Social Security COLA and a new debt crisis is likely to return after the 2014 election.

For my views on the politics of the COLA dispute go to the following post.



For some estimates of the potential financial impacts of a change in the COLA go to the following post.



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