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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
ues to be used as the index for determining annual cost-of-living adjustments in social security and other programs. The weights of the two indexes differ, but only modestly. And to the extent the weighting structures do differ, the CPI-U weighting structure is closer to that of the elderly.4
Over the past 20 years, the average difference between the growth of the two indexes has been small—the CPI-U grew 0.13 percent faster, although there was substantially greater divergence over shorter time periods. Over the past 5 years, however, the difference between the growth of the two indexes averaged only 0.04 percent. The differences do not seem to be large enough to warrant switching the index used for indexing social security benefits to the CPI-U. However, if the instrument used for adjusting social security benefits is changed to the superlative index, as we recommend, that index should be based on CPI-U rather than CPI-W weights.
Plutocratic Versus Democratic Indexes
The current CPI is a plutocratic index. In constructing the national index each individual good is assigned a weight equal to overall consumer expenditures on that item. This procedure assigns to the spending pattern of each individual household an importance in the overall index proportional to its total consumption expenditures; the spending patterns and preferences of the rich count more than those of the poor. A democratic CPI would be one in which each household’s spending pattern received equal weight.
Arguably, a plutocratic index may be the appropriate choice for an overall indicator of inflation in consumer goods. And since, in the construction of measures of national output, the individual strata indexes of the CPI are used to deflate most of the components of consumption expenditures, a plutocratic version of those individual indexes is needed. But for purposes of indexing social security benefits and other public transfer payments and for dealing with economic welfare considerations generally, a democratically constructed index seems clearly preferable since it assigns the preferences of each household equal importance.
When the goods in the CPI are grouped into nine broad categories, the CPI-U comes closer to the CPI-E in five cases, the CPI-W is closer in one case, and three are about equal. The median income of the population covered by the CPI-W should be closer to that of the median elderly household than to the median for the population covered by the CPI-U. If the individual items and shopping outlets whose prices enter the CPI-W were specifically chosen to reflect the purchases and shopping patterns of the wage-earning population, that index might be superior to the CPI-U for indexing social security benefits. But as we have repeatedly pointed out, the same selection of individual items and outlets goes into all the price indexes—CPI-U as well as CPI-W. The indexes differ only through the variations in their upper-level weights.