J. Exon: “Does the consumer price index have an upward bias? The author believes that, while substitution and formula biases…”

“Does the consumer price index have an upward bias? The author believes that, while substitution and formula biases exist, together they might amount to 0.3 to 0.5 percentage points. Other alleged causes of bias are not considered significant. The budget negotiators already have incorporated substitution and formula adjustments in their baseline assumptions. To go beyond this is an attempt to camouflage an increase in taxes and a cut in Social Security, which could be regressive and call for excessive sacrifice by the elderly. On January 10, 1995, Federal Reserve Chairman Alan Greenspan suggested that adjusting the Consumer Price Index (CPI) for alleged upward biases might produce federal budget savings measures in hundreds of billions of dollars. Understandably, politicians and political commentators found this very exciting, being largely unencumbered by technical knowledge about it. Gobs of free money? Why didn't we notice this before.…”