Obama speaking about the FY 2014 budget

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For example, if the price of bananas were to rise from $0.40/lb to $10/lb, all but a small subset of the population would stop buying bananas and instead buy more apples and oranges. Using the current measure of inflation, however, would assume that everyone keeps buying the same allocation of fruit when bananas rise to $10/lb as they did when they were $0.40/lb.



A more accurate inflation adjustment would seek to maintain the same overall quantity and quality of a basket of goods and services while not specifying precisely what individual products and brands of products must be included in that basket. This is precisely what the chained consumer price index (CPI) attempts to track—a constant level of purchases that allows for small changes in items and brands based on consumers’ responses to changes in prices.


Democrats and Republicans alike should support a move to the chained CPI on pure policy grounds. Moving to a chained CPI is the right policy in tax reform, where Congress can offset the revenue it raises with pro-growth policies like lowering marginal tax rates. But is should not be used as a way to raise revenue.