The consumer price index is a useful index of inflation, and may be used to adjust the limits of each tax bracket for the upcoming year. Nevertheless the CPI has its critics. A lot of things are used in the determination of the value of the index at a given time – take a look at the latest values for a few of the categories listed under the Consumer Price Index Summary - and you’ll see it is easy to argue against the balance of the categories used.
Note that 100 is the base CPI value from December 1982. The latest CPI is listed under unadjusted ‘All Items’ – for example, in April 2020 this was 256.389; values higher than this number have increased more than average since December 1982; those less than this have increased less than average.
Consider the effects of inflation on retirees. (We painted a pessimistic picture in Section 3B – one example showed that $40,000 per year in 40 years time equates to just $12,262 in today’s dollars.) It should be clear that some categories used in the CPI calculation are less of an issue for retired folks:
a) Look down the Expenditure Category column and identify some categories that might be important for retirees. Then look at the indices for these categories. Are these better (lower) or worse (higher) than the overall number? Write down the indices for ‘All Items’ as well as for the categories you choose as important for retirees. (Are any of these ‘much’ higher than expected?)
b) Discuss whether the retirement gloom shown in 3B was pessimistic or a reality