Everything You Need to Know About Chained CPI

Written by S. Arteta and Fact Checked by The Law Dictionary Staff  

Chained CPI (Consumer Price Index) was part of President Obama's 2014 budget proposal. Chained CPI has the purpose of shaving off more than $1 trillion from spending on government programs.

CPI is an economic measure used to figure out the rate of inflation and changes in the price levels. CPI takes an abstract basket of the consumers goods such asĀ  groceries, housing, gasoline and clothing and takes the average prices of the basket's components in a year's time.

To illustrate, in 2012, the average assumption is that a typical household contributed 41% of its spending on housing, 15% for food and 17% for transportation. If there exists an over-all rise in the cost of the basket, inflation occurs.

In cases of inflation, the government makes use of the CPI in order to index benefits such as the Social Security payments and to determine income tax brackets.

Chained CPI refers to "Chained Consumer Price Index for All Urban Customers". It is referred to as "chained" because it takes into account a phenomenon in economics known as "substitution bias". In a simple statement, it merely means that when prices of goods are high, the consumers must buy cheaper substitutes instead.

During the debate on the budget proposal, it was said that through the chained CPI, the government could save about $300 billion over the next decade. However, this comes with a price. In order to achieve this, the government must reduce future Social Security payments and pension payments to federal retirees.

The following are some facts that all Americans must know about chained "CPI":

  1. Chained CPI can cut the growth in benefits of other programs such as the Social Security and Supplemental Security Income;
  2. Chained CPI may reduce the budget deficit of the country;
  3. Cost of living adjustments will be lower with Chained CPI;
  4. Chained CPI is predicted to save the government about $130 billion over the next decade

The Chained CPI is merely a proposal of the President which the Republicans posited a repulsive reaction. It was alleged that the proposal was a challenge for the Republicans to accept new tax laws that would improve America's economy. The Chained CPI is a common ground where all American's will benefit from at the expense of adversely affecting other government benefits such as the Social Security and Supplemental Security Income.





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