the indexes might work in the opposite direction. In either case, the earlier relationship and the nature of the insurance provided by indexing will change. Between 1995 and 2000, BLS introduced methodological changes in the index that are estimated to have reduced the reported annual rate of CPI inflation by 0.5 percent (Council of Economic Advisors, 1999:94).16 If recent history is a guide, the introduction of a (lagged) superlative index in the same year will produce a 0.1 to 0.2 percent reduction in the growth rate, which would be approximately reflected in any advance estimate of a superlative index that the BLS decides to produce.

Changes in statistical methodology, when they occur during the life of a contract, can cause difficulties for the parties to indexed contracts. There are a number of ways for statistical agencies to reduce those difficulties. Each time a significant technical change or a series of changes is made, a “research” series that compares the index constructed under both old and new methods for a number of years can be constructed. Both the Bureau of Economic Analysis (BEA) and BLS have been following this practice after recent revisions. To the extent that private parties to indexed contracts have provided for arbitration or other procedures to resolve disputes when significant revisions occur in index design, the availability of such research series could aid the parties in making appropriate adjustments.17

If the research that precedes a change in index measurement makes it possible to produce estimates of the effect of the change prior to its introduction into the index, this information can give both parties about to enter into an indexed contract notice of what is likely to occur. Along this line, BLS made available the results of its experimental geomeans research before the technique was introduced into the CPI, and the BEA published its Fisher chain price indexes for 5 years before substituting them for the old fixed-weight indexes. Finally, subject to considerations of cost and feasibility, it would be helpful to continue publishing “old-style” indexes for several years after major revisions have been introduced.

INFLATION-INDEXED TREASURY SECURITIES

The uses of price indexes considered thus far have primarily been concerned with adjusting the value of flows of payments of various kinds. However, such indexes can also be used to adjust asset values to reflect price changes over time.

16  

This estimate excludes the effect of the 1998 updating of the market basket, measured as the difference between the published index, with its 1982-1984 bases, and the results of a rolling biennial update (a practice which the BLS plans to introduce in 2002).

17  

In its instructions, “How to Use the Consumer Price Index for Escalation,” BLS urges the incorporation in the contract of a built-in method for handling such situations (http://stats.bls.gov/cpifact3.htm).



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