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April 12, 2013 at 07:13 AM
President Barack Obama’s 2014 budget includes a key change in the way the government measures inflation. If adopted, the chained Consumer Price Index would have far-reaching effects because so many programs are adjusted each year based on year-to-year changes in consumer prices.
How it would work:
The new measure would show a lower level of inflation than the more widely used Consumer Price Index.
It assumes that as prices rise, consumers would turn to lower-cost alternatives, reducing the amount of inflation they experience. For example, if the price of beef increases while the price of pork does not, people will buy more pork rather than pay the higher beef prices.
What it would save:
The change would reduce the federal budget deficit by $230 billion over the next decade, according to Obama’s budget proposal. Of that, $100 billion would come from higher tax revenues because annual inflation adjustments to tax brackets, the standard deduction and personal exemptions would be smaller.
