What Is Chained CPI?

On Sunday, "chained CPI" nearly killed fiscal cliff talks in the Senate. Then the removal of chained CPI from the negotiating table saved the prospect of a deal to keep us all from dropping off the cliff when the clock strikes midnight on January 1, 2013.

So, what exactly is Chained CPI?

For an explanation, we turn to National Journal's Sophie Quinton, who broke chained CPI down for us earlier in December. "Chained CPI," writes Quinton, "is an idea that almost everyone supports in theory but hardly anyone is willing to risk in practice."

Chained CPI is a measure of inflation created by the Bureau of Labor Statistics that has been touted as a more accurate way to factor rises in the cost-of-living into, among other things, social security benefits and the tax code. Chained CPI doesn't rise as quickly as the measure of inflation that the government uses now, so if the government switched to chained CPI to calculate social security benefits, benefits would increase more slowly over time. Similarly, if chained CPI was applied to the tax code, tax brackets would change at a slower rate, moving tax-payers into higher brackets faster. 

Chained CPI rises slower than the measure of inflation that the government currently uses by making different assumptions about how people spend money. Chained CPI hinges on the idea that when the price of one good rises, people are more likely to buy a similar, cheaper good. Or, as a former staffer for President Obama's fiscal commission told NPR, when the price of apples goes up, maybe you'll buy oranges or bananas instead. The current measure of inflation assumes that you'll just keep on buying apples, raising your cost-of-living faster.

What chained CPI does here is "chain" together groups of goods. This change could save $200-300 billion over the next decade by slowing the growth in cost-of-living adjustments, trimming social security benefits and increasing taxes.

So, why the controversy? Many Democrats have scoffed at the social security benefit hit that comes with chained CPI -- especially to older seniors who rely most on the social security income. Also, it isn't always as simple as chaining apples and oranges, especially when broader necessities like medical care and heating come into play. There are also of course ways of making chained CPI less severe to the social security benefits of needy seniors. Sophie Quinton points out that the Simpson-Bowles plan, among others, features such protections.  

Even if chained CPI isn't going to be part of a fiscal cliff deal now, don't be surprised to see this technical-sounding adjustment that could save hundreds of billions return later.

Get the latest news and analysis delivered to your inbox. Sign up for National Journal's morning alert, Wake-Up Call, and afternoon newsletter, The Edge. Subscribe here.