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A primer on chained Consumer Price Index

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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.

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How it’s perceived:

The proposed change is unpopular among many Democrats in Congress and advocates for seniors who complain that it would disproportionately hit low- and middle-income families.

It’s popular among budget hawks because it cuts benefits and increases taxes gradually, in ways that might not be readily apparent to most Americans. The savings, however, become substantial over time.

What would be cut:

Obama’s budget proposal did not specify the impact on individual benefit programs. The Congressional Budget Office in an earlier analysis estimated the total benefit reductions over the next decade at:

  • Social Security: $127 billion;
  • Federal retirement programs for military and civilian workers and Supplemental Security Income: $38 billion.
  • Medicare and Medicaid: $29 billion;
  • On average, annual increases in Social Security payments, government pensions and veterans’ benefits would be about 0.3 percentage points smaller each year, according to the chief actuary for the Social Security Administration.