Is the United States CPI Biased Across Income and Age Groups?
IMF Working Papers, September 1, 1998
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Bibliographic details
- Authors: S. Nuri Erbas, Chera L. Sayers
- Published: September 1, 1998
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451855784.001
Summary
- The recent Boskin Commission Report (1996) underscores a significant upward bias in CPI measurement in the United States.
- This upward bias may result in excessive cost-of-living adjustment (COLA) of some entitlements in the federal budget because COLA is indexed to CPI.
- The paper presents evidence that overall CPI may be biased against lower income elderly households, the primary beneficiaries of COLA.
- Although a downward adjustment in CPI resulting in an across-the-board cut in COLA of entitlements may yield significant budgetary savings, it may result in a deterioration in income distribution against lower income elderly households.
Key findings and evidence
- The Boskin Commission Report (1996) finding: significant upward bias in CPI measurement.
- Distributional concern highlighted:
- Overall CPI may be biased against lower income elderly households.
- Lower income elderly households are identified as primary beneficiaries of COLA.
- Trade-off identified:
- Downward adjustment in CPI → potential significant budgetary savings.
- Downward adjustment in CPI → potential deterioration in income distribution against lower income elderly households.
Policy implications and considerations
- Indexation policy:
- COLA indexed to CPI means measurement bias in CPI directly affects entitlements.
- Policymakers face a trade-off between fiscal savings from CPI adjustment and the welfare of lower income elderly households.
- Equity vs. fiscal consolidation:
- Across-the-board CPI adjustments could produce budgetary savings but risk worsening income distribution for vulnerable elderly groups.
- Targeting and design options (implied considerations based on findings):
- Consideration of differential adjustments or compensating measures for lower income elderly households if CPI is revised downward.
- Need for careful assessment of distributional impacts before implementing CPI-based reductions in COLA.
Publication and metadata
- Authors: S. Nuri Erbas, Chera L. Sayers
- Date: September 1, 1998
- Series: IMF Working Papers, Working Paper No. 1998/136
- Pages: 34
- Volume: 1998
- Issue: 136
- DOI: https://doi.org/10.5089/9781451855784.001
- Stock No: WPIEA1361998
- ISBN: 9781451855784
- ISSN: 1018-5941
- Subjects: Aging, Consumer price indexes, Expenditure, Inflation, National accounts, Personal income, Population and demographics, Prices
- Keywords: age cohort, age groups, Aging, COLA, Consumer price indexes, CPI, CPI measurement, CPI-W bias, CPI-W inflation, income, income brackets, income cohort, Inflation, major CPI-W component, market basket weight, Personal income, WP
Source: S. Nuri Erbas, and Chera L. Sayers "Is the United States CPI Biased Across Income and Age Groups?", IMF Working Papers 1998, 136 (1998). DOI: https://doi.org/10.5089/9781451855784.001
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- Is The United States CPI Biased Across Income and Age Groups? - WP/98/136