US inflation rate could be overstated by 1.1%
Known for his commentary on international relations and US politics, Rupert Cornwell also contributes obituaries and occasionally even a column for the sports pages. With The Independent since its launch in 1986, he was the paper's first Moscow correspondent - covering the collapse of the Soviet Union – during which time he won two British Press Awards. Previously a foreign correspondent for the Financial Times and Reuters, he has also been a diplomatic correspondent, leader writer and columnist, and has served as Washington bureau editor. In 1983 he published God's Banker, about Roberto Calvi, the Italian banker found hanging from Blackfriars Bridge.
Thursday 05 December 1996
According to a report to Congress by an authoritative independent commission yesterday, the consumer price index (CPI) overstates the real inflation rate by 1.1 percentage points. In other words, US inflation is running at not just under 3 per cent a year, but little more than 1.5 per cent. For the public finances, the consequences of such an adjustment would be momentous.
Social security payments, geared to the CPI, would rise less rapidly, as would inflation-linked income tax deductions and exemptions, meaning that the Treasury's tax take would be higher. Higher receipts and smaller outlays would reduce the federal borrowing requirement.
In all, calculates the commission headed by Michael Boskin, a former chief economic adviser to President Bush, a change in the index could cut the federal deficit by $60bn (pounds 37bn) by 2002, the target year of both democratic and Republican plans for a balanced budget. On present trends, that year's deficit is put at between $150bn and $200bn.
Doubts about the validity of the CPI have long been voiced here by no less than Alan Greenspan, Federal Reserve Board chairman, among others. There is a growing view that the structure of the CPI does not take sufficient account of ever fiercer competition in the economy, and the tendency of consumers to buy cheaper alternatives if a particular item covered in the index becomes more expensive. But the latest finding could not be better timed for the balanced budget lobby.
Not only was the US deficit of $106bn in fiscal 1996 the lowest in 20 years (and at 1.6 per cent of GDP the most respectable of any large industrial country), but the political landscape is favourable for a bipartisan budget agreement within the next 12 to 18 months.
Even before yesterday's report, the gap between Republican and Democratic budget blueprints had shrunk to a total of $148bn over the five years until 2002. An enlarged Republican majority in the Senate makes it more likely that a constitutional amendment to balance the budget will clear Congress in 1997, giving both sides political cover to strike an agreement.
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