	Introduction

This report provides technical and logistical information on how the Chained Consumer Price Index for all Urban Consumers (C-CPI-U) is constructed and reported by the U.S. Bureau of Labor Statistics (BLS). For information on programs indexed to the CPI, see CRS Report R42000, Inflation-Indexing Elements in Federal Entitlement Programs , coordinated by [author name scrubbed]. For information on how Social Security benefits could be affected by using the C-CPI-U to compute annual cost-of-living adjustments (COLAs), see CRS Report R42086, Using a Different Cost-of-Living Measure for Social Security Beneficiaries: Some Policy Considerations , by [author name scrubbed]. The CPI is probably the most important measure of inflation developed by the federal government because it is used to make automatic adjustments that affect both outlays and revenues. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the basis for adjusting Social Security retirement benefits and the Consumer Price Index for All Urban Consumers (CPI-U) is the basis for adjusting personal income tax brackets to keep up with inflation, for example. Changing the government's basis for indexing these among other federal programs and tax provisions from the CPI-W and CPI-U could have substantial effects on the budget deficit. (Hereinafter in this report, the CPI-W and CPI-U will be referred to collectively as the standard CPI.) In April 2013, a modified version of the Chained CPI-U proposal was included in President Obama's Fiscal Year 2014 Budget. As prices change over time, consumers will tend to buy more of those goods and services whose prices are rising slower than average and fewer of those goods and services whose prices are rising faster than average. So-called substitution bias causes the standard CPI to overstate the effect of inflation on consumer well-being. This makes it attractive for calculating COLAs. The C-CPI-U

In an effort to better estimate the effect of consumer substitution on the CPI, BLS introduced a supplemental measure known as the Chained Consumer Price Index for all Urban Consumers (C-CPI-U). The aim of the C-CPI-U is to produce a measure of change in consumer prices that is free of upper-level substitution bias. The interim release for 2009 indicated a larger increase in the cost of living than either the CPI-U or CPI-W, but the final estimate was revised downward by 1.3 percentage points, which produced an increase in the C-CPI-U that was smaller than the increase in the standard CPI. If the C-CPI-U is a better measure of changes in the cost of living, and the goal of indexing is strictly to reflect changes in the cost of living, then the C-CPI-U might be considered as a measure on which to base those adjustments. As previously discussed, however, a major complication of switching to the C-CPI-U is that final data are not available for up to two years after the reference period.
The U.S. Bureau of Labor Statistics (BLS) publishes two important measures of inflation: the Consumer Price Index for all Urban Consumers (CPI-U) and the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). (Hereinafter in this report, the CPI-W and CPI-U will be referred to collectively as the standard CPI.) The standard CPI might seem like just another economic indicator, but it is a powerful policy lever. Because the CPI-W is used to calculate annual cost-of-living adjustments (COLAs) to Social Security retirement benefits and the CPI-U is used to calculate annual inflation adjustments to personal income tax brackets, for example, changing the basis of the adjustments could substantially affect outlays and revenues.
Since August 2002, BLS has published a supplemental measure known as the Chained Consumer Price Index for all Urban Consumers (C-CPI-U). The aim of the C-CPI-U is to produce a measure of change in consumer prices that is free of substitution bias. One of the difficulties in estimating cost-of-living changes is that consumers often alter their buying patterns in response to changing relative prices. In other words, consumers tend to buy more of the goods and services whose prices are rising slower than average and fewer of the goods and services whose prices are rising faster than average. Substitution is believed to insulate consumers from the full effect of rising prices on maintaining their standard of living. Because the CPI-W and CPI-U do not entirely account for substitution, they overstate the impact of inflation on consumer well-being.
As a result of better reflecting consumer substitution, the C-CPI-U has typically increased to a lesser extent than either the CPI-U or CPI-W. This relationship has prompted calls for switching to the C-CPI-U when calculating automatic adjustments to inflation-indexed federal programs and individual tax provisions to slow growth in the budget deficit. The 2010 "Simpson-Bowles" report recommended government-wide replacement of the CPI-W and CPI-U with the chained CPI, for example. In April 2013, a modified version of the Chained CPI-U proposal was included in President Obama's Fiscal Year 2014 Budget.
The CPI-W and CPI-U are final upon being issued, making them attractive for use in calculating cost-of-living adjustments. In comparison, the C-CPI-U is subject to two revisions after its first release. If the two indexes were replaced by the C-CPI-U, cost-of-living adjustments would either have to wait until the final number was available or rely on preliminary estimates that could change up to two years after the fact.
This report provides technical and logistical information on how the C-CPI-U is constructed and reported by the BLS. For information on programs indexed to the CPI, see CRS Report R42000, Inflation-Indexing Elements in Federal Entitlement Programs, coordinated by [author name scrubbed]. For information on how Social Security benefits could be affected by using the Chained CPI-U to compute annual COLAs, see CRS Report R42086, Using a Different Cost-of-Living Measure for Social Security Beneficiaries: Some Policy Considerations, by [author name scrubbed].