EVERYBODY KNOWS that inflation is high. But exactly how high? How do you measure it? There's more than one way, and it makes quite a difference which one the country uses. The most familiar of them, the monthly Consumer Price Index, said that infaltion was running at an annual rate of more than 13 percent in the first half of this year. But there is also the Personal Consumption Expenditure deflator, which is at least as valid an indicator. It said that the rate was 10 percent.
The discrepancy is a good deal more than a matter of historical interest. A great many Americans' incomes are now adjusted automatically, to one degree or another, to the inflation rate -- which, in present practice, means the Consumer Price Index. Social Security benefits and federal pensions are all linked to it directly. Many labor contracts are pegged to it through cost-of-living adjustments.
The Consumer Price Index clearly overstates the inflation rate in certain respects -- and that, in turn, contributes to further inflation by triggering outsized in wages and pensions. The overstatement was negigible in those happy days when prices by any measure rose only several percentage points a year. But the higher the rates go, the more important the statistical subleties become.
When the prices of houses move up or mortgage interest rates rise, the CPI moves up to reflect it. But the higher costs of buying a house affect, directly, only the small minority of the population that is buying a house at that moment. It doesn't affect at all the family that has lived for years in the same house and is still happily paying off that old 6 percent mortgage. The deflator treats home purchases differently. It says that buying a house is an investment and doesn't belong in the personal consumption accounts at all. Perhaps the difference seems obscure. But, translated into inflation adjustments, it means more than $1 billion a year to the federal government alone.
Perhaps when the price of fuel oil soared last summer, you switched your furnace to natural gas. The CPI calculates an average price increase, giving the same weight each month to heating oil and to gas. But the deflator gives less weight ot the high price of fuel oil when people use less of it and gives greater weight to the lower price of gas because people are using more of it. The deflator continually adjusts to the ways in which people really spend their money. The CPI does not.
The federal government has hesitated to make many changes in the CPI, because it does not wish to appear to be tampering with the numbers. But the House Budget Committee's task force on inflation is opening hearings this week on the subtle influences exerted by the statistics themselves. It's time for a careful examination of inflation accounting, and the possibility that the measuring stick is actually making inflation worse.