Inflation Higher Than Reported--CPI to be Revised Upward, Bureau of Labor Statistics Calculating Glitch Blamed

By John M. Berry

Washington Post Staff Writer

Wednesday, September 27, 2000; Page E01

Consumer price inflation has been slightly higher over the past year than officially reported because of a calculating glitch at the Bureau of Labor Statistics, government sources said.

The bureau is preparing to revise upward the change over the last year in its consumer price index, the nation's most closely watched measure of inflation and the one used by the government to calculate cost-of-living adjustments in Social Security payments, veterans benefits and federal pensions.

For the 12-month period ended last month, consumer prices rose 3.4 percent--partly as a result of surging energy prices--while the core CPI, which excludes energy and food items, rose 2.5 percent.

The revision, which could be announced before the end of this week, is likely to result in an official inflation rate that is higher by about 0.1 to 0.3 percentage points for the past 12 months, the sources said.

A revision of this magnitude won't please either Federal Reserve officials or investors, because to some extent both have been unhappy with the acceleration this year of both the CPI and the core portion of the index.

Fed policymakers are widely expected to leave their target for short-term interest rates unchanged when they meet next Tuesday, and the revision probably won't affect that outcome. But it won't be welcome news for those investors who have begun to anticipate that the next Fed policy change would be a rate reduction.

The difference will mean a bigger January increase in the government benefit payments received by roughly one in five Americans.

Last year, the Social Security cost-of-living adjustment was 2.4 percent, which was determined by the increase in the CPI average for the third quarter of 1999 from the average for the third quarter of 1998. The adjustment boosted the program's average monthly benefit by $19, to $804.

That meant that each increase of one-tenth of a percentage point in the CPI was worth 79 cents a month to an average Social Security beneficiary, or $9.49 over the course of this year.

An upward revision in the CPI also will mean a bit less federal tax revenue, and hence a slightly smaller budget surplus, because the CPI is used to index numerous provisions of the tax code, such as the size of personal exemptions and the points at which income tax brackets increase.

The CPI also is used in the private sector to adjust for inflation in a variety of ways, including some rents and labor contracts.

This will mark a break in the BLS's policy of not revising the CPI once it has been published because of the widespread ramifications of such a change for both the government and private sector.

When asked, Katharine G. Abraham, commissioner of labor statistics, declined to comment.

BLS officials notified the White House of the problem earlier this week.

BLS statisticians discovered the glitch some time ago, but it has taken quite a while for them to rerun the mountains of price data collected each month to determine its impact on the overall index. Government sources did not disclose when the problem first began to affect the index.

The CPI is compiled from data on the changes in the prices paid by consumers for a hypothetical "market basket" of certain goods and services. The current problem involves the agency's efforts to assess how much of the change in an item's price is due to an improvement in its quality--for example, when the price of a certain new car is compared with last year's model of the same car.

If the new model of an item includes improvements, such as when an option on a new car has become standard equipment, that is taken into account in deciding how much of the price increase represents inflation and how much is a quality improvement.

The error appears to have occurred from accidentally double-counting some allowances for quality improvements, sources said.

Since there are relatively few quality adjustments for food and energy items, the upward revision is likely to affect the core portion of the CPI as much as the overall index.

Errors occasionally have been detected in the past in some of the raw data that are used to calculate the CPI, but apparently they have never been large enough to affect the overall index.

Economists have debated for years whether the CPI accurately measures inflation, and whether the BLS's methodology should be changed. Based on its own research and recommendations from outside economists, the BLS has made changes in recent years to improve the CPI.

Correcting the current error is a technical matter, and will not change the BLS's overall method or approach for making quality-improvement allowances.

http://www.washingtonpost.com/wp-dyn/articles/A23129-2000Sep26.html

-- Carl Jenkins (Somewherepress@aol.com), September 27, 2000

Answers

Wednesday September 27 12:42 PM ET

Labor Dept. Says Mismeasured Inflation

WASHINGTON (Reuters) - The U.S. Labor Department said on Wednesday that a computer glitch had caused it to mismeasure the main U.S. inflation gauge, the Consumer Price Index, and that it was making revisions.

However, the department said in a statement: ``the general pattern of consumer price behavior this year was little affected.''

For example, it said, from December 1999 to August 2000 the CPI rose by 2.7 percent on a non-seasonally adjusted basis according to the corrected data. That compared with a 2.6 percent gain originally published.

The department said the error involved software used to calculate the residential rent and owners' equivalent rent components of the CPI.

Fears of a significant change in the data had pressured the U.S. bond market in early trade and negative sentiment persisted even after the Labor Department statement.

However, economists said the revision was not drastic enough to alter the sentiment of the inflation-wary U.S. Federal Reserve.

``The bottom line is the magnitude is not very big. It is not enough to get excited about,'' Marty Mauro, senior economist at Merrill Lynch in New York said.

``It does say that the inflation picture is a little worse than expected. But the Fed is more forward-looking than that, so the fact that inflation was a little bit higher earlier this year is not going to fundamentally change their policy.''

Labor said more details would be released at a 9:30 a.m. (1330 GMT) briefing on Thursday by Bureau of Labor Statistics Commissioner Katharine Abraham.

The revisions to the CPI will cover the January to August 2000 period, the department said.

http://dailynews.yahoo.com/h/nm/20000927/bs/economy_cpi_dc_2.html

-- Carl Jenkins (Somewherepress@aol.com), September 27, 2000.

Wed, 27 Sep 2000, 1:37pm EDT

U.S. Labor Dept. Revises CPI Higher to 2.7% Increase (Update2)

By Michael McKee

Washington, Sept. 27 (Bloomberg) -- U.S. consumer prices rose 0.1 percentage point more than previously reported from December to August because the Bureau of Labor Statistics erred in calculating the cost of housing, the Labor Department said.

The CPI rose a non-seasonally adjusted 2.7 percent in the eight months through August, compared with a 2.6 percent rise first reported for that period on Sept. 15, the BLS said in a statement today. The statement didn't include changes to the CPI's core rate, which excludes food and energy prices.

``The revisions to the CPI correct an error recently discovered in the software used to calculate the residential rent and owner's equivalent rent components of the index,'' the BLS said.

While the agency plans to announce other revisions to the CPI at 9:30 a.m. tomorrow, ``the general pattern of consumer price behavior this year was little affected,'' it said.

Analysts said the revision, first reported by The Washington Post, wasn't significant enough to force Federal Reserve officials to reassess whether they need to push interest rates higher in the coming months.

U.S. Treasury securities fell following The Post report. The Treasury's 10-year note fell 5/32 point, pushing up its yield 2 basis points to 5.82 percent. It was little changed after the BLS release, as traders bet the revision would have little effect on monetary policy.

``The news about the CPI is not meaningful,'' said Raye Kanzenbach, who helps manage $7 billion at Insight Investment Management in Minneapolis. ''Inflation is not a problem even if the CPI is revised up.''

Fed Policy

The Fed's policy-makers meet Tuesday to decide whether to change the overnight bank lending rate, which has been at a nine- year high of 6.5 percent since May. Investors are expecting no change in Fed policy next week, or any time before the end of the year judging by trading in federal funds futures contracts.

Whether that view changes depends on whether Fed officials believe the revision -- the first ever for the CPI -- represents a one-time error or a more significant change in the trend of only gradually increasing inflation, analysts said.

The Fed has other inflation indicators to watch, including the employment cost index, the GDP deflator, and the personal consumption expenditure index, said Paul Christopher, an economist at A.G. Edwards & Sons in St. Louis.

``If you compare those with the CPI, you don't find the CPI being underreported relative to those other indicators,'' Christopher said.

Through the first six months of the year, the ECI, which measures wages, salaries, and benefits, was up 4.4 percent. The GDP deflator was up 2.1 percent and the PCE index up 2.5 percent. This year, the Fed switched from the CPI to the PCE index in making its semi-annual inflation forecasts.

Still, the changes could affect government benefit payments and cost- of-living increases in private contracts. The BLS has never revised the CPI, in part for that reason.

Social Security

Last year Social Security recipients got a 2.4 percent cost- of- living adjustment. Based on that calculation, each one-tenth of a percentage point increase in the CPI would be worth an extra 79 cents a month to the average Social Security beneficiary.

The CPI is also used to index much of the federal tax code, including tax brackets, and so any change might lower government revenue and result in a smaller budget surplus. Earlier today, President Bill Clinton announced the surplus for fiscal year 1999 would likely be $230 billion dollars.

The revision is to the non-seasonally adjusted CPI index over the past eight months, beginning with the change from December to January, according to Todd Wilson, a CPI economist at the BLS. The government initially reported a 2.3 percent increase in the seasonally adjusted CPI over the same period. The BLS didn't provide a revised seasonally adjusted figure today.

The error came in two of the sub-indexes used to calculate the housing portion of the index. Even though home sales have been at record levels -- existing home sales rose 9.3 percent in August -- over the first eight months of the year, residential rent costs rose 2.16 percent while owners equivalent rent, which approximates the resale cost of homes, is up just 1.84 percent.

`Market Basket'

``After years of hearing how the CPI was overstated, I've felt that recently we were running a risk that inflation was being understated,'' said Mark Vitner, senior economist at First Union Corp. in Charlotte. ``Housing seems to be woefully understated in the CPI recently.''

The error crept into the CPI calculations as part of a BLS effort to make the price index more accurate. The CPI is based on the change in price of a ``market basket'' of goods and services typically purchased by consumers.

One difficulty in measuring that change is accounting for quality improvements -- faster processors in new computers, for example, or safety improvements in automobiles. BLS statisticians try to parse how much of a price increase is due to the quality improvement and how much to an actual increase in its cost.

A tripling in crude oil prices has pushed up the CPI over the past 18 months. In August 1999, the year-over-year inflation rate was 2.3 percent. The core rate was up 1.9 percent in August 1999.

Earlier this month, the Labor Department reported that consumer prices fell 0.1 percent in August -- the first monthly decline in more than 14 years.

A congressional commission, headed by Stanford University professor and former White House economist Michael Boskin, said in 1996 that the CPI overstated U.S. inflation by as much as 1.1 percentage points a year -- partly because it didn't properly account for quality improvements.

This past March, former members of the Boskin Commission said the CPI still overstated inflation by about 0.8 percentage point a year, even after changes in the way it's calculated.

The General Accounting Office asked former commission members whether changes in the way the CPI is collected and analyzed have reduced that bias. All four surviving members of the commission agreed that while the Labor Department had made improvements, more needed to be done.

``Certainly, a sizeable upward bias remains in the CPI,'' Boskin told the GAO. ``Hopefully future improvements (some planned or underway) will whittle away at the bias.''

BLS Commissioner Katharine Abraham disputed the former commission members' conclusions in March. ``We don't believe that it is currently possible to produce reliable estimates of bias in the CPI,'' she said in a letter to the GAO. The BLS has instituted seven major changes in the CPI over the past four years, and three more are planned by 2002, she said.

CPI researchers have ``a history of being in the forefront of price measurement research and operational innovation,'' Abraham said. ``The BLS will continue to develop and evaluate potential improvements in CPI methods.''

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Top%20Financial% 20News&s1=blk&tp=ad_topright_topfin&T=markets_bfgcgi_content99.ht&s2=b lk&bt=blk&s=AOdIuJBOSVS5TLiBM

-- Carl Jenkins (Somewherepress@aol.com), September 27, 2000.