(2 of 2)
Like a policeman stopping motorists and telling them that the traffic laws have just been changed, the Federal Government last week announced that it was altering the way it calculates the level of inflation. This will be important for the 60 million Americans whose salaries, pensions or even alimony payments are linked to increases in the Consumer Price Index. Washington, for example, pays out almost $3 billion in benefits for every percentage point increase in the CPI.
The Government calculates this inflation index by determining how much the price of a basket of goods and services a typical family buys has increased in the past month. The index has long been criticized because it overstates the costs of housing. And as the prices of homes and mortgage rates have jumped in the past two years, the CPI has exploded.
Under the new system announced last week, the CPI'S housing survey will be based on the rental or lease value of a home, thus eliminating the asset element that has driven home prices skyward. If the new rental equivalency method had been used over the past twelve months, the Consumer Price Index would have risen 9.2% instead of 11%.