Today a panel appointed by the Senate will release a report showing the government’s yardstick for inflation - the Consumer Price Index - is seriously flawed. The report is expected to say the widely followed index overstates inflation by as much as 2 percentage points.
In other words, inflation isn’t rising at the 3 percent annual rate we’ve been told; the correct figure may be closer to 1 percent.
At the store, it’s obvious inflation isn’t as bad as the CPI’s outdated measurements would suggest. While dairy and pork prices are up, many foods are unchanged or even lower this year. The typical box of Kellogg’s cereal, for example, is about 19 percent cheaper than last year. Prices for electronic equipment, such as televisions and video recorders, continue to slide. Apparel and home furnishing prices have dropped, too.
This would seem to be cause for celebration. Considering the misery inflicted by rising prices in the 1970s, you’d think all Americans would be thrilled to have the government declare the war on inflation has been won.
But not everyone wants to change the flawed CPI. In fact, many will howl in protest at the prospect. That’s because payments of Social Security and other federal benefit programs are tied to the CPI. When the index rises, payouts rise, too.
If the government were to lower its inflation measure by 2 percentage points, retirees would not get the Social Security increases they are expecting. Labor leaders also would object because they count on high inflation figures to justify cost-of-living increases for workers.
Still, Congress should follow the recommendations of the panel, created by the Senate Finance Committee. Making the CPI a more accurate measure would benefit the country enormously. For one thing, reducing the cost-ofliving increases under federal entitlement programs by just one percentage point over the next decade would save the government $634 billion.
That move would sharply reduce the deficit, making it easier to either cut taxes or redirect revenue toward education and infrastructure.
Also, having a more accurate CPI would strengthen the arguments of workers for raises, even though labor leaders may not see it that way now. Union representatives have grown accustomed to claiming workers need cost-ofliving adjustments to keep pace with inflation. That’s a simple and strong argument at the bargaining table.
But in reality, workers deserve raises because they have earned them, not because of inflation. Worker productivity has been rising, though Americans may not realize it because of the overblown CPI.
This example may help demonstrate that point: Suppose Company USA totals its annual revenue and reports an increase of 5 percent. Then it subtracts 3 percent to account for inflation and tells workers that revenue was up a mere 2 percent - too little to justify big raises.
But wait. Inflation wasn’t 3 percent; it probably was 1 percent. So Company USA actually did have a good year. Time to break out the champagne and give the workers a raise.
Stock investors obviously realize that business is much better than government figures would have us believe. Because of overestimates of inflation, the government keeps telling us our productivity has been rising at a pathetic annual rate of 1 percent in the 1990s.
But if productivity has been so lousy, why have corporate profits been so good? Why do stock prices set records nearly every day? Why do chief executive officers keep getting enormous bonuses?
The stock market is flying high because output is rising much faster than government figures would suggest. The puffed-up CPI is distorting the productivity picture and giving workers an inferiority complex.
Employees shouldn’t have to rely on bloated inflation figures to justify raises. They should get bonuses this year because they have earned them. Americans are working harder and smarter, enriching bosses and stockholders in the process. They deserve to be let in on the party.