Using Inflation-Adjusted Dollars in Analyzing Political Developments

Abstract

• Low inflation is a goal of economic policy and a measure of its success; • Inflation-adjustment for government benefits affects payments to Social Security recipients and some others. The Boskin Commission (discussed below) estimated that by 1983 the Consumer Price Index (CPI) adjustments to Social Security, using what they believed to be a flawed CPI, resulted in $8.76 billion benefit overpayment, 5.55% of total benefits (Boskin Commission Report in Baker 1998, 15); • Inflation-adjustment of federal tax brackets and other elements of the national government income tax affects the amount of national government revenue and of tax payments. A CPI measure that showed lower inflation than the current CPI would change tax brackets and other elements much less and thereby sharply increase federal revenues, with very large cumulative effects; • Cost-of-living adjustments (COLAs) affect the pay of those employees who have automatic price escalators in their contracts, although in recent years evidently fewer than 5% of all private-sector employees have such contracts; • Even relatively low levels of inflation produce, cumulatively, large changes over time. For example, an inflation rate of 2.4% per year, the average during 1998 to 2002, changes price levels about 11% in five years, 21% in 10 years, 38% in 20 years, and 61% in 40 years.