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Master's Professional Reports Abstract



Consumer Price Index: Biases, Alternatives, and Financial Implications

The Consumer Price Index (CPI) is the principal measure of inflationary pressure in the consumer markets of the U.S. economy. CPI plays an important role in the formation of fiscal and monetary policy. Numerous federal, state and local government programs and tax features are "indexed" for changes in the CPI. But recently, it has become the target of considerable criticism regarding its allegedly archaic composition, its possible inaccuracy, mostly overstatement, of widespread price inflation, its huge effect, through indexing, on various federal and state programs, and its enormous financial implications in governmental policy making. It is estimated that a one percent increase in the index would add $6.5 billion to the federal deficit. The uncertainty about the CPI and its non-market driven components can greatly affect various tools and targets of monetary policy. Focusing on the accuracy of the CPI as a measure of inflation and the financial implications of its potential adjustments on the federal budget and government monetary policies, this report provides extensive studies on the current structure of the CPI, the measurement issues of the CPI, and discusses various possible alternatives to using the CPI as the measure of the cost of living.

--Author's foreword.