Buried in the budget legislation just passed by Congress was a small, but potentially significant program is indexed for inflation.
Homeownership costs, which have inflated the consumer price index in the last few years as interest rates have soared, will not be excluded from the index used for part of the program.
The food-stamp program's standard deduction -- which is subtracted from gross income before eligibility is determined -- and the ceilings on expense deductions for dependent care and shelter will be linked in the future to a version of the CPI that excludes homeownership costs, as well as food prices counted elsewhere in the program.
The administration is studying the whole issue of indexing, according to Jerry Jordan, a member of the Council of Economic Advisers. Officials will look at the indexing of the income tax structure, as included in the tax bill just passed, at wage indexing with cost-of-living-adjustment clauses, and at the indexing of federal programs. They may ned to move fast to stop Congress from making piecemeal changes in indexing, which may have the opposite effect from what is expected.
The CPI is commonly used to index federal grograms, such as Social Security. But its treatment of homeownership costs, and particularly the heavy weight it gives to changes in mortgage rates, has led to growing concern in Congress. Over the past few years the CPI has overstated the true rate of Inflation, many experts argue.
For instance, much of the large increase in the July CPI numbers reported Tuesday is attributed to a 2.1 percent jump in homeownership costs during the month. This helped push the overall monthly rise to 1.2 percent, or an annual rate of 15.2 percent.
But in one of several experimental indexes being published by the Bureau of Labor Statistics, homeownership costs are estimated to have risen only 0.5 percent in July. When the cost of owning a home is recalculated to measure the rental equivalent of living in the same house, the 12-month rise in the Cpi shrinks from 10.7 percent to 9.6.
Congress probably decided to take the housing component out of the food-stamp index to save money. But ironically, it did it at a time when homeownership costs are likely to level off and thus begin to hold the CPI down. The change may end up adding to food-stamp costs, rather than cutting them.
The change in the food-stamp program has only a relatively small effect on beneficiaries, as food prices are the biggest determinant of changes in other prices. But for other recipients of other federal benefits, the overall indexing can be much more important.
The real value of their benefits depends on how they are adjusted for inflation. Assuming that mortgage rates level off in the short term, the real standard of living of persons whose benefits are linked to the current CPI will probably decline, just as they have enjoyed real increase in their living standard in the recent past because their benefits were "overindexed" for inflation.
Congress has left it up to the Bureau of Labor Statistics and the Agriculture Department to decide on the new indexing for the food-stamp program. As more than 80 percent of those on food stamps live in rental housing, an increase in the relative weight of rental costs might be appropriate.
The bureau has been working on a replacement for the CPI that attempts to measure the "rentakl equivalence" costs of housing for homeowners, and so takes out the distortions of the current homeownership component. Although this has diverged from the CPI inrecent years, it is now moving more closely with it.