Potential bias in the Consumer Price Index (CPI) and its effect on the budget deficit have
been the subject of intense debate over the past several years. Alan Greenspan, Chairman of
the Federal Reserve Board of Governors, testified before the Senate Finance Committee to his
belief that the CPI has an upward bias of between 0.5 and 1.5 percentage points per year and
noted that a reduction of one percentage point in the indexation of tax rates and benefit
programs would save the federal government roughly $150 billion over five years (Greenspan,
1995). The Finance Committee subsequently appointed the Advisory Commission to Study the
Consumer Price Index (known as the Boskin Commission), which estimated that the CPI
overstates prospective changes in the cost of living by more than 1.1% per year, and called this
a substantial improvement over much larger historical biases (Advisory Committee, 1996).
There is not, however, consensus on even the direction of bias, much less the size. Empirical
evidence is sketchy, and conclusions about bias abstract from the fact that the major benefit
program indexed by the CPI—Social Security—uses an index that does not even include Social
Security beneficiaries in its coverage. In this light, it is hard to make definitive estimates of
bias.