STANDARD OF LIVING vs. COST OF LIVING

The major problem with the debate regarding changing to the Chained CPI from the Fixed Weight CPI has to do with the fact that both are referred to as Cost of Living measures. They are not. The Fixed Weight CPI can be thought of as the cost of maintaining your standard of living. The Chained CPI is the cost of living at your current level. When I, and most of my friends, think of inflation and the cost of living we usually are thinking in terms of the cost of maintaining our living standard.

Those who want to use the Chained CPI argue that peoples' buying patterns have changed and the Chained CPI would reflect the change. But, people change their buying patterns for several reasons. One reason is that price changes alter our buying patterns. On the other hand we alter our buying because our tastes and preferences change. If  the only change was due to tastes and preferences I would support the use of the Chained CPI because the change would represent maintenance  of our Standard of Living. However, if we change because of higher prices we are lowering our standard of living; the Chained Index does not reflect this while the Fixed Rate Index does. 

Using the Fixed Weight CPI to adjust Social Security, Veterans Benefits and other government payments allows Seniors and Veterans to maintain their standard of living. The use of the chained index would lead them to fall behind. It is also deceptive to the public in general. For an extreme example: If the cut in food stamps mean that are large portion of the urban population has to eat dog food, because they can no long afford meat and chicken made for human consumption, the cost of dog food would be put into the Chained CPI to reflect how people are spending their money. This would lead to either shrinkage in the Chained CPI or a perceived lower level of price growth. The Chained CPI advocates would claim that the cost of living is shrinking or not growing and start saying how well off we all are. However, are we really better off eating dog food?