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Budget Deal Could Hinge on Agreement to Adjust the CPI

Monday, December 2, 1996

OnLine

Whether the White House and congressional Republicans reach an agreement to balance the federal budget deficit may depend on if the two sides agree to adjust the Consumer Price Index, congressional leaders said Dec. 1.

Congressional leaders from both parties urged the White House to alter the way the CPI is calculated in accordance with recommendations to be made by a congressionally appointed panel, which will issue a report on Dec. 4.

The CPI influences federal spending because many government payments are pegged to changes in the index. Some economists believe the CPI could overstate inflation by as much as 2%.

Exerting pressure on the administration, Sen. Don Nickles, R-Okla., said on NBC’s Meet The Press, "This is an area where I think you’ll see Congress not willing to move unless we have the signal from the administration that they’re likewise going to use or be willing to use an accurate CPI."

Similarly, ranking Senate Finance Committee Democrat Sen. Daniel Patrick Moynihan of New York agreed, saying "we won’t have ... a budget process of any consequence," if an agreement on adjusting the CPI is not reached.

White House noncommittal

The White House remains noncommittal about how it will react to the forthcoming report, prepared by former Council of Economic Advisors Chair Michael Boskin.

"We will consider very carefully any recommendations that come from the Boskin group," White House spokesman Mike McCurry said. "Basically, the president has long felt that changes to the CPI calculation should not be a political issue, but based on a consensus of those who have got an expert opinion," he added.

On the budget itself, McCurry is encouraged by GOP efforts to reconcile their budget assumptions with those used by the White House. The administration and congressional Republicans are moving toward a consensus on what the assumptions should be and that "creates a better climate," he said. Moynihan for some time has been trying to persuade government officials to modify the CPI calculation.

During Senate Finance Committee hearings earlier this year Federal Reserve Board Chairman Alan Greenspan also urged Congress to consider modifying how the CPI is calculated. Currently, the Labor Department tracks consumer prices through a market "basket" of 10 items. When their prices rise so does the index. Greenspan, Moynihan, and others believe consumers do not always continue to buy items when their prices rise and instead substitute cheaper items, so their overall costs remain lower. If beef prices rise, shoppers purchase more chicken, under this theory. Proponents of altering the CPI calculation believe it should reflect those changes in consumer behavior. According to Greenspan, a one-percentage-point adjustment downward in the CPI could save as much as $150 billion over six years.

Last year the two sides disagreed over the underlying assumptions of the federal budget, and thus they failed to reach agreement on how much needed to be cut to balance the budget.