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An easy guide to ‘chained CPI’

PRESIDENT OBAMA’S recent budget proposes to reduce Social Security costs by utilizing “chained CPI” to calculate cost-of-living increases (“A party rift on Obama budget,” Page A1, April 11).

Allow me to explain how chained CPI works. As prices rise due to inflation, economists argue that consumers will substitute less expensive alternatives for those products. By taking this into account, the increase in cost-of-living expenses is less than you would otherwise think.

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Inflation as calculated according to this method is therefore less than the simple increase in the price of goods. For example, consider the cost of food. Suppose the price of steak increases by 10 percent. More consumers will switch to bologna, which is less costly than steak. Voila! No inflation. And as bologna becomes more and more expensive, we can switch to foraging for edible insects and roadkill.

Similarly, as clothing becomes more expensive, consumers can easily switch to less expensive attire. Eventually, as even the least expensive lines of clothing become too expensive, the savvy consumer can fashion his own clothing from animal skins. (Maybe even getting double use from that roadkill.)

Housing prices are also not a problem. As traditional housing becomes prohibitively expensive, inflation is easily erased by rational consumer substitution. Living in caves is an obvious solution.

Bruce Smith


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