FIGHT BACK : CONSUMER PRICE INDEX MEANS CONFUSION BY THE NUMBERS.

Byline: David Horowitz 

The Consumer Price Index is one of the most familiar and least understood statistics in this country, and right now, it's at the center of an intense and very public debate. When experts debate economic policy, most of us zone out. But the fact is, how this issue is resolved will affect nearly all of us in one way or another.

In its simplest terms, the CPI is an imaginary market basket filled with nearly 400 different items from 22,000 outlets nationwide. Prices are tracked each month, and a monthly report is issued by the Bureau of Labor Statistics describing how the index rose or fell compared to previous months or years.

What makes the CPI controversial is that some items in the basket - food, housing, energy, for example - weigh more heavily in the calculation than other items, and that's been a source of disagreement among economists for decades. Another problem is that what goes into the basket and how heavily it is weighed is updated only about every 10 years, which means the assumptions and formulas used by the number crunchers may be years out of date.

All of this makes the CPI a somewhat fuzzy number that many economists here and overseas consider unreliable. None of this would be in the news but for a blue-ribbon panel, appointed by Congress and headed by J. Michael Boskin, a respected economics professor at Stanford. The Boskin Committee studied the CPI for 18 months and decided the venerable index needs an overhaul.

Raises in Social Security benefits are tied to the CPI. So are food stamp benefits, retirement plans, veterans pensions, union contracts, public welfare, income tax brackets and personal tax exemptions. They all rise and fall with the Consumer Price Index. Many employers use the CPI as a guideline in granting wage and benefit increases.

Here's the big, ugly political issue. According to the Boskin panel, the CPI consistently overestimates inflation in the national economy. These experts say prices aren't really rising as quickly as the CPI indicates, which means that Social Security payments, contractual pay raises and other benefits are rising faster than the actual cost of living. In effect, all of those people are being overpaid.

That is political dynamite! Any talk of tampering with pensions, pay raises or Social Security increases immediately raises howls of protest from a dozen different directions.

Why mess with the CPI at all? Because a reduction of only 1 percent (1.1 percent is the figure used by the Boskin Committee) would increase federal revenues by $45 billion and reduce federal spending by $111 billion by the year 2006. That would make a huge dent in the ballooning national debt that we are passing on to our grandchildren.

Most importantly, perhaps, if the CPI is wrong (and there is no agreement that it is), then it should be corrected as a matter of principle. Otherwise, it becomes just another statistic being manipulated for political purposes.