Greenspan wants CPI corrected Cost-of-living figures are off, Fed chief says

March 05, 1997|By BLOOMBERG NEWS

WASHINGTON -- Federal Reserve Chairman Alan Greenspan told lawmakers yesterday the consumer price index overstates inflation and called for a commission to recommend changes in the way the United States calculates cost-of-living increases for government benefits.

"We know with near certainty that the current CPI is off," Greenspan told members of the House Budget Committee. "There's a very high probability that the bias ranges from half a percentage point to 1 1/2 percentage points per year."

The Fed chairman's comments added impetus to a growing push on Capitol Hill for changes in the way cost-of-living increases are calculated, a move that could save the government billions in benefit payments and help lawmakers to balance the budget. Current increases are pegged to the rate of growth in the CPI.

President Clinton is inching toward recommending an advisory panel that would annually review and recommend changes in cost-of-living increases, a suggestion Republican Senate Majority Leader Trent Lott of Mississippi put forward last week.

Greenspan said the Labor Department's Bureau of Labor Statistics, which compiles the index, should take immediate steps to fix as much of that bias as possible, and Congress should create an independent national commission to make recommendations on how to deal with the rest.

Also yesterday, Fed Vice Chairwoman Alice Rivlin told thrift industry executives that a "conservative" adjustment to the CPI should be implemented as a first step toward a CPI fix.

The CPI might be cut by around 0.4 percentage point while further adjustments to the index are pondered, she said.

"The way we measure inflation, the way we measure productivity are flawed," Rivlin told a gathering of America's Community Bankers.

Greenspan said Fed economists' research essentially confirms the findings of a congressionally appointed commission chaired by Stanford University economist Michael Boskin, which concluded last December that the CPI overstates inflation by at least 1.1 percentage points a year.

That overstatement will result in $148 billion in overpayments to recipients of Social Security and federal benefit programs by 2006 unless changes are made, the report estimated.

Greenspan suggested that this cost-of-living panel would adjust the cost-of-living allowances currently based on the CPI. If the panel found, as Boskin and others assert, that the current measure overstates growth and results in higher payments, the savings could be used to help lawmakers balance the budget.

The CPI currently uses the prices of a so-called basket of goods, measuring how much the price of that basket has increased each month. The change is widely considered the rate of inflation in the United States.

Pub Date: 3/05/97

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