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Mr. Chairman and Members of the Committee, I am pleased to be with you this morning to comment on the consumer price index (CPI). The CPI is widely used as an indicator of inflation and changes in the cost of living. It is of considerable importance to the federal budget because it is used to index benefits in major entitlement programs as well as to adjust income tax brackets. Yet many experts argue that the CPI consistently overstates changes in prices and, therefore, provides an inaccurate measure of changes in the cost of living. That potential upward bias in cost-of-living adjustments has spurred the recent controversy about the CPI.

The Congressional Budget Office's (CBO's) review of available evidence indicates that the CPI does in fact overstate the increase in the cost of living for the overall population. The extent of that upward bias is not known with certainty. But the empirical evidence, which addresses many but not all of the possible sources of bias, indicates that the CPI probably overstates growth in the cost of living by between 0.2 and 0.8 percentage points a year. Other potential sources of bias that have not yet been verified empirically may offset to some extent or greatly add to the measured overstatement.¹

1. See Congressional Budget Office, Is the Growth of the CPI a Biased Measure of Changes in the Cost of Living! CBO Paper (October 1994).

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