Federal panel to suggest new gauge of inflation Consumer Price Index overestimates cost of living, members say


WASHINGTON -- A panel appointed by Congress is expected to recommend this week that the government create a price gauge that would more accurately reflect inflation -- a move that would result in less-generous increases in Social Security payments and other benefits but would also help lower the deficit, officials said.

One high-ranking official with knowledge of the panel's report said Friday that the proposed index would better reflect what consumers buy each year.

It would largely, perhaps entirely, supplant the Consumer Price Index as the gauge used to calculate cost-of-living increases and adjust segments of the tax system for the effects of higher prices, the official said.

A commission member also said the proposed remedy includes an alternate index.

It could not be learned, however, how often it would be calculated or whether the price index would be used in conjunction with it.

Dr. Michael Boskin, a Stanford economics professor who heads the five-member commission appointed by the Senate Finance Committee, would say only that the final report would include updated estimates of how much the price index overstates inflation and offer recommendations for overcoming the problem.

The new index, like the price index, would be based on prices for a market basket of goods purchased by consumers.

But it would be adjusted as frequently as once a year to reflect changes in consumer behavior, such as the embrace of newly available products or a switch to substitutes when something gets too expensive.

The commission's report, scheduled to be released Wednesday, comes as momentum is building for some politically defensible way to cut the federal budget deficit further and to solve the

longer-term problem of financing Social Security when the baby boom generation starts to retire in about 15 years.

The concept has bipartisan support, although neither Democrats nor Republicans are eager to take the lead on making the change, given the political sensitivity of tinkering with federal benefits.

Congress will need to act

The commission's recommendation would need to be translated into legislation before it can be put into effect. The issue is almost certain to come before Congress next year.

Most economists, including the five-member Boskin panel, say they believe that the price index substantially overstates inflation and that the government thus pays billions of dollars more a year to beneficiaries of federal programs than necessary to keep them even with inflation.

In an interim report in September 1995, largely confirmed by its subsequent work, the Boskin group estimated the overstatement at 1.5 percentage points in recent years, somewhat more than half the rise calculated by the price index on which benefits have been based.

Critics of the price index say it fails to reflect adequately the improvements in the quality of goods and services people buy as well as the types of stores they use.

Most important, the critics say, the price index was devised to capture the price of a fixed basket of items and does not reflect the fact that consumers frequently change their buying patterns in response to rising, or falling, prices.

Therefore, it is not a true measure of consumer cost of living and, they say, should not be the gauge used to adjust to it.

For example, if the price of hardcover books rises too high, more people turn to paperbacks or use the library.

The price index would register an increase in this case; a consumer, assuming roughly equal satisfaction, would have spent less.

Various members of Congress are thought likely to seize on the commission's findings to press for adoption of a new gauge.

Among them are Sen. Daniel Patrick Moynihan of New York, the ranking Democratic member of the Senate Finance Committee, who was instrumental in creating the advisory panel.

Others on the record as favoring the idea include Sen. John H. Chafee of Rhode Island, Rep. John R. Kasich of Ohio, both influential Republicans, and Rep. Charles W. Stenholm of Texas and John M. Spratt of South Carolina, both Democrats.

Greenspan in favor of change

Another powerful advocate of finding a better gauge is Federal Reserve Chairman Alan Greenspan, formerly chief economic adviser to President Gerald R. Ford.

Boskin was the chief economic adviser to President George Bush.

At a congressional hearing last year, Greenspan said of the Consumer Price Index, "We do not take the CPI literally" in making monetary policy.

The Clinton administration is thought to be inclined to support adoption of a better adjustment gauge but is unwilling to do so publicly without the backing of a wider group of economists and other financial experts and members of both political parties.

In an interview yesterday, Treasury Secretary Robert Rubin responded cautiously when asked about using a new gauge to help solve the problems of budgetary and entitlement-program imbalance at a cost of reduced benefits to millions of citizens.

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