When inflation takes off, the Chained CPI will be even more devastating

[Uncle Joe]

and I believe the government is preparing for increased inflation, they know it's coming.

One way to decrease debt is to inflate the economy particularly if the cost of hard earned entitlements don't keep pace.

http://www.democraticunderground.com/10021972143

The technical details are pretty dull. The Fed announced that it intends to keep its key interest rate at zero until unemployment drops to 6.5%, the first time it’s ever set a target for employment. It also signaled that it will tolerate inflation as high as 2.5%, above its stated goal of 2%. And it extended its “QE3” bond-buying program to hold down long-term interest rates. What it means is that Bernanke and his fellow inflation doves have won their argument with the hawks, and the Fed is stepping on the accelerator instead of riding the brakes. After three years of doing a wonderful job of maintaining stable prices while doing a terrible job of maximizing employment, the Fed finally seems determined to take its dual mandate seriously. As Bernanke admitted in his press conference, the Fed has consistently overestimated the pace of growth since the recovery began in 2009.

The current CPI used in determining Social Security is inferior but the "Chained" version is worse because the people will have less flexibility in adapting to rapidly increasing prices without taking a hit to their Social Security benefits.

http://en.wikipedia.org/wiki/United_States_Consumer_Price_Index

Chained CPI for All Urban Consumers (C-CPI-U)This index applies to the same target population as the CPI-U. The same raw data are used, but a different formula is employed to calculate average prices. The chained CPI was developed to overcome a shortcoming of the CPI-U series, which does not account for the changes that people make in the composition of goods that they purchase over time, often in response to price changes. The alternative method of the C-CPI-U is intended to capture consumers' behavior as they respond to relative price changes. However, while the correction is believed to produce more accurate figures sequentially when compounded over long spans of time it can dramatically understate inflation because some substitution activity is short lived. E.g. if food prices were to rise 20% month-to-month the amount spent on food would rise less than 20% because people would buy more rice and less steak, but when prices rise 20% over 10 years this doesn't result in everyone consuming only rice.

The Republicans wanted the Chained CPI for a reason, they want to eliminate hard earned entitlements and this death by a thousand cuts is an easy way to do it.

[jeff47]

1. Which Chained CPI?

There isn't just one.

Chained CPI-E (Targeted at typical spending by elderly) would actually be a larger cost-of-living increase this year. "Vanilla" Chained CPI would be worse.

All the doomsday articles are claiming the "vanilla" Chained CPI since that produces lousy numbers. I'd like to see which one is being proposed. There is a logic to "chaining", and the current method that uses the "vanilla" CPI is not good for the elderly - they buy different stuff than the 'average' consumer.

If we couple the chaining to switching to CPI-E, it would be an improvement.

[Uncle Joe]

2. I'm not sure, but I doubt the Republicans would propose any version that pays out more.

http://www.democraticunderground.com/10022030190Q

Yes, Jay, a lot of top Democrats on the Hill, and I think President Obama, spent the campaign season saying, let’s not touch Social Security -- it doesn’t add to the deficit; we can resolve this issue without going to that entitlement program. What is the President’s message to those lawmakers who promised constituents that Social Security would not be touched after the President now has put chain CPI on the table for Republicans?

MR. CARNEY: Well, let’s be clear about one thing: The President didn’t put it on the table. This is something that Republicans want. And it is --

[jeff47]

3. Their only remaining political base is the elderly

They either need Obama to take the blame for cutting Social Security, or they need to be the saviors that switch it to the CPI-E.

It shouldn't be that hard a sell.

[Uncle Joe]

4. Do you have a link explaining how the CPI-E version works?

I've tried Googling it but I'm not getting anything.

[jeff47]

6. Here's one from BLS.

http://www.bls.gov/opub/focus/volume2_number15/cpi_2_15.htm

[Uncle Joe]

7. It seems to me if the ACA puts a curb on medical care inflation as compared to overall inflation,

my OP still holds true and the CPI-E may turn out to be even worse.

Relative behavior of price indexes
From December 1982 through December 2011, the all-items CPI-E rose at an annual average rate of 3.1 percent, compared with increases of 2.9 percent for both the CPI-U and CPI-W. There are several reasons that older Americans faced slightly higher inflation rates over the past 29 years. First, older Americans devote a substantially larger share of their total budgets to medical care. For example, as shown in table 1, the share of expenditures on medical care by the CPI-E population is roughly double that of either the CPI-U population or the CPI-W population. In addition, over the 1983–2011 period, medical care inflation increased significantly more than inflation for most other goods and services (5.1 percent annually for medical care, compared with 2.8 percent for all items less medical care). In fact, medical care inflation has outpaced overall inflation in each of the last 29 years, save for 1996.

Second, older Americans spend relatively more on shelter (see table 1), and during the last 29 years shelter costs have modestly outpaced overall inflation. Thus, the medical care and shelter components account for a significant portion of the difference between the higher rate of increase measured for the CPI-E relative to the two official indexes during the 1983–2011 period.

Although the CPI-E generally outpaced the official measures of inflation over the 1983–2011 timeframe, recent trends show different results. From 2006 to 2011, both the all-items CPI-E and the CPI-U rose at an average annual rate of 2.3 percent, while the CPI-W increased 2.4 percent. This turnaround was caused primarily by changes in the relative inflation rates of medical care and shelter, compared with the overall inflation rate. Specifically, the gap between medical care inflation and overall inflation has generally fallen since 2005, and shelter inflation has been rising slightly more slowly than overall inflation over the 2006–2011 period.

The CPI-E which is still considered an "experimental index" primarily outperformed the other chained indexes because it was weighted toward health care and shelter inflation which had so far outpaced overall inflation..

Thus if the ACA works as touted and decreases medical care inflation that would be the major component of CPI-E and if overall inflation accelerated in comparison, CPI-E would fall behind.

[woo me with science]

11. The CPI-E is being waved as an excuse to implement the regular chained CPI across the board.

It's a scam, not to mention that the CPI-E is hypothetical at this point anyway and certainly not in the President's proposal. But the point is that they are trying to justify blanket implementation of the regular chained CPI, "as long as there is protection for the vulnerable." What garbage. Democrats should not be talking about implementing Republican policies, period.

Note how the propaganda has shifted our understanding of what the Democratic Party owes those who support it.

We used to believe that the Democratic Party had a responsibility to put forth policies to HELP the 99 percent.

Over time, Third Way propaganda lowered those expectations, so that now we are exhorted to be grateful if the party merely refrains from ATTACKING us in some way; hence, the bids to be joyful when Obama merely refrains from *cutting* SS or Medicare, without any policies to improve the lot of those already struggling on these programs.

Now we are moving toward the view that it's okay for Democrats to assault SOME of us, as long as it's not "the most vulnerable." We are being fed the idea that it would be perfectly fine to implement the right-wing, tax-regressive scam of a chained CPI across this nation, as long as protections are provided for a few of "the most vulnerable."

What utter bullshit.

[Uncle Joe]

12. I don't believe any of the "Chained CPIs" are good, they're a step back-wards

from an already inadequate valuation system.

As other posters on this thread have stated and which I concur with, chained CPIs treat all the people as perfect shoppers, is penny wise/pound foolish and creates nothing but a downward economic spiral.

The people are being driven into poverty which weakens the overall economic system.

[woo me with science]

13. Agree 100 percent.

They are corporatist scams, all of them.

There are windstorms of bullshit propaganda flying through this place, trying to justify the unjustifiable.

[Faryn Balyncd]

5. It will trigger a downward spiral - a downward accellerator, so to speak - of perpetual substitution

...in which ordinary Americans, like Lucy in the chocolate factory, will never be able to catch up.... Each substitution of inferior items (or going without) will trigger the chained CPI to register even less inflation (if not deflation) even in the face of rampant inflation....

That, in turn, will cause ordinary Americans incomes to go down (all sources of income that are liked to CPI).

Which will force them to make ever increasing inferior substitutions (shit-burgers for catfood....), which will trigger another round of the same.

Thus, chained CPI will act as a negative accellerator, triggerring a downward spiral, feeding on itself.

[woo me with science]

14. These are terrifying predictions,

and they make the government's ongoing militarization of our police forces and building of new prisons and surveillance systems particularly chilling.

One wonders what sort of civil unrest they are expecting, as the reality of the "new normal" of austerity they are devising for us begins to dawn on the population.

We have witnessed great pain in other countries as a result of corporate rule, but I wonder how many Americans really have an idea yet of how severe the changes in our standard of living are likely to get.

[No Compromise]

8. Speculation mimics inflation which is why we are already seeing costs through the roof

They want to chain the CPI? Then Stop Goldman Sachs and Koch from Speculating on our Food and Gas
http://www.democraticunderground.com/10022030269

[starroute]

9. There are already related problems with the calculation of inflation

If I understand it correctly, we already have the flip side of what the chained CPI would do. That is, if the cheapest television available this year costs more than last year's cheapest model but has a bunch more bells and whistles, they count that as a price decrease.

This might be a good deal if you're looking for those added features, but the typical elderly person just wants to replace what they're used to and has no use for the upgrades. All they know is that it costs more than it used to for a new TV.

I think this is a carryover from the same problem with economics in general -- that they assume we're all the ideal consumer, looking to maximize value and minimize costs, and have no clue about what people really need or how they really live.

[Uncle Joe]

10. I agree, starroute.

The government has become so "penny wise and pound foolish" in finding every possible way to hold down entitlement payouts over perceived or real inflation, that they're continuously driving increasing numbers of people into poverty and creating a major drag on the economy at the same time.