Book contents
- Frontmatter
- Contents
- Acknowledgments
- 1 Introduction
- 2 The measurement of economic welfare
- 3 Measuring consumption: An initial look at the data
- 4 The cost of living
- 5 The standard of living
- 6 Does a rising tide raise all ships?
- 7 Consumption and poverty
- 8 Conclusions
- Appendix 1 Measuring individual and social welfare
- Appendix 2 Interpolating and extrapolating the expenditure distribution
- References
- Index
4 - The cost of living
Published online by Cambridge University Press: 10 December 2009
- Frontmatter
- Contents
- Acknowledgments
- 1 Introduction
- 2 The measurement of economic welfare
- 3 Measuring consumption: An initial look at the data
- 4 The cost of living
- 5 The standard of living
- 6 Does a rising tide raise all ships?
- 7 Consumption and poverty
- 8 Conclusions
- Appendix 1 Measuring individual and social welfare
- Appendix 2 Interpolating and extrapolating the expenditure distribution
- References
- Index
Summary
Estimates of the cost of living are among the most important statistics produced by the federal government because of their widespread use in indexing government transfer payments. Social Security benefits are, by far, the largest of the federal outlays that are indexed, although Supplemental Security Income and a variety of other federal compensation and pension programs also contain provisions for indexing. Tax brackets are adjusted for inflation to avoid what is commonly known as “bracket creep,” as is the personal exemption. It is clear that, taken together, relatively minor biases in the price indexes used for these adjustments can have an enormous impact on fiscal policy.
Cost-of-living indexes also play a critical role in the measurement of social welfare. They are used to adjust the poverty line over time and to account for inflation in comparisons of national income or expenditure. The standard-of-living index presented in Chapter 2, for example, requires the deflation of aggregate expenditures by an estimate of the cost of living. The key question is, which index should be used for this purpose?
Over the years, the CPI has been used extensively and virtually exclusively as the government's estimate of the cost of living despite increasing evidence of systematic biases. A panel of experts convened to study the CPI concluded that the inflation bias is around 1.1 percent per year, with a “plausible” range of 0.8 percent to 1.6 percent.
- Type
- Chapter
- Information
- Consumption and Social WelfareLiving Standards and their Distribution in the United States, pp. 67 - 87Publisher: Cambridge University PressPrint publication year: 2000