Have consumer prices risen nearly 100 percent in the past decade, or have they gone up only 85.6 percent? And, in the first 10 months of 1979, did they rise at an annual rate of 13.5 percent, or only a 10.5 percent rate?
Those are not small differences, and the answers depend on which of the federal government's two monthly inflation indexes covering consumer prices you want to pick. For both the year and the decade, they tell a significantly different story.
If you are a Social Security beneficiary, a retired federal government worker, or perhaps covered by a union contract with a cost-of-living escalator, you definitely will want to stick with the well-known Consumer Price Index to get the biggest cost-of-living increase in your pay or benefits. In only one year out of the past 10 did the CPI rise less than its brand new competitor -- the Personal Consumption Expenditure deflator.
If you are an ordinary consumer wondering how far your paycheck can be stretched, or whether you are keeping up with today's inflation in prices of things an average American is buying, in the amounts in which they are buying them, the new index probably is a better measure.
The PCE deflator is published by the Bureau of Economic Analysis at the Commerce Department. Commerce has published a PCE deflator for many years, but only on a quarterly basis. As of last month, it is available monthly, and some Carter administration officials wish it could achieve an instant popularity as a guide to the seriousness of inflation's bite.
Obviously, President Carter and his aides would like to be able to tell the nation prices were rising at a 10.5 percent rate instead of a 13.5 percent rate, for political as well as economic reasons.
But any such statement -- and presidential inflation adviser Alfred Kahn has been making them -- has substantial truth behind it, according to a number of economists. The fact is, the CPI is overstating the current rate of inflation.
At a hearing last week of a House Budget Committee task force probing the effect on the federal budget of that overstatement, Lawrence DeMilner of the Congressional Budget Office testified, "The current CPI mismeasures home ownership costs, so that the recent increases in the CPI exaggerate the actual rise in the cost of living."
DeMilner, who is chief of CBO's inflation impact unit, said that with a better measure of home ownership costs substituted for that portion of the CPI, its rise "would have been 1.1 percentage points less in 1978 and 2.0 percentage points less in 1979."
The problem is this. The home ownership component of the CPI, which is 10 percent of the total index, treats houses like any other good, DeMilner said, "that is, as though they were consumed in the year they were bought. In fact, the services rendered by a house are consumed over its entire lifetime."
This treatment, which the PCE deflator does not use, in effect, assumes the entire purchase price of the house is paid in one year. Thus, when house prices rise sharply, as they have in recent years, this exaggerates the impact on consumer spending patterns.
There is a further exaggeration because in the CPI the calculations for mortgage interest payments and property taxes are based on the purchase price, which itself is exaggerated.
The PCE deflator, on the other hand, takes a different tack altogether. It prices housing according to the rental value of the property. If house prices are rising faster than rents, then the difference is due to people buying houses as an investment, not just because they want the shelter they provide.
The home ownership distortion, DeMilner said, "stems from the introduction of capital appreciation into the CPI as though it were an increase in the cost of living when its effect is just the opposite." Many owners have used the increased equity in the houses to finance other purchases through a mortgage refinancing.