One of the least discussed, but
potentially most significant, provisions in President Obama’s budget is
the use of the “chained consumer price index” (chained CPI), to measure
the effect of inflation on people’s standard of living. Chained
CPI is an effort to alter the perceived impact of inflation via the
gimmick of “full substitution." This is the assumption that when the
price of one consumer product increases, consumers will simply
substitute a similar, lower-cost product with no adverse effect. Thus,
the government decides your standard of living is not affected if you
can no longer afford to eat steak, as long as you can afford to eat
hamburger.
The problem with “full substitution” should be obvious to anyone not
on the government payroll. Since consumers did not choose to buy
lower-priced beef before inflation raised the price of steak, they
obviously preferred steak. So if the Federal Reserve’s policies
create inflation that forces you to purchase hamburger instead of steak,
your standard of living is lowered. CPI already uses this sort
of substitution to mask the costs of inflation, but chained CPI uses
those substitutions more frequently, thereby lowering the reported rate
of inflation.
Supporters of chained CPI also argue that the government should take
into account technology and other advances that enhance the quality of
the products we buy. By this theory, increasing prices signal an
increase in our standard of living! While it is certainly true that
advances in technology improve our standard of living, it is also true
that, left undisturbed, market processes tend to lower the prices of
goods. Remember the mobile phones from the 1980s? They had
limited service, constantly needed charging, and were extremely
expensive. Today, almost all Americans can easily afford a mobile device
to make and receive calls, texts, and e-mails, as well as use the
Internet, watch movies, read books, and more.
The same process occurred with personal computers, cars, and
numerous other products. If left alone, the operations of the market
place will deliver higher quality and lower prices. It is only
when the government interferes with the operation of the market,
especially via fiat money, that consumers must contend with constant
price increases.
The goal of chained CPI is to decrease the government's
obligation to meet its promise to keep up with the cost of living in
programs like Social Security. But it does not prevent
individuals who have a nominal increase in income from being pushed into
a higher income bracket. Both are achieved without a vote of Congress.
Noted financial analyst Peter Schiff correctly calls chained CPI a
measurement of the cost of survival. Instead of using inflation
statistics as a political ploy to raise taxes and artificially cut
spending, the President and Congress should use a measurement that actually captures the eroding standard of living caused by the Federal Reserve’s inflationary policies.
Changing government statistics to exploit the decline in the American
way of life and benefit big spending politicians and their cronies in
the big banks does nothing but harm the American people.
And here is Ron Paul addressing - among other things - the counter-factual supporting the "but what would we do without them" argument for the Fed...
