Despite a robust economy, many people are feeling a pinch in their living standard. As prices rise steadily over time, wages (especially after-tax) haven’t risen with the same determination. Inflation is winning, and Americans are losing.
Inflation affects each and every one of us, so we should at least be able to understand how the rate of inflation is measured. The government’s measurement of general price levels and ongoing inflation rate is dubbed the “Consumer Price Index,” or CPI.
The very government that defined the term “inflation” (which is also the government that charged itself with calculating the rate of inflation), would be consistent in applying the inflation rate to its various functions. So it would seem, but reality is sharply different.
There are many designated governmental applications for the CPI, including granting cost-of-living wage increases to government employees, Social Security recipients, and government contractors. We call that the “income side” of the CPI. There is also a “tax side” use for the CPI. Most income tax calculations and rules are also indexed to changes in the CPI.
In recent days, the government has released significant new data for the upcoming 2020 Tax Year. The application that affects most Americans is the modifications to the Income Tax Brackets for all taxpayers. Tax Brackets have been expanded by 3.68% to prevent what is called “bracket creep” among taxpayers. In other words, inflationary wage increases do not push the taxpayer into a higher marginal tax bracket.
Affecting a significant portion of the population is the cost-of-living increase for Social Security recipients and various types of government employees and contractors. Based on the CPI change being applied to income tax brackets, these people could be expected to receive a pay increase of 3.68%. Right?
Wrong! The government employees’ pay increase for 2020 will be 1.6%, which is less than half of the tax bracket increase. What’s up with that? I thought the CPI was a fixed, calculated number, didn’t you? Adding insult to injury for “Seasoned Citizens,” your Medicare premiums are rising 7%, eating up a good chunk of the Social Security increase. Worse yet, Medicare (out-of-pocket) deductibles are also rising by 7%. Pay more, get less – what a deal!
For years now, it has been apparent to me that the government’s calculation of the inflation rate has dramatically under-reported the true cost of living. Most people seem to agree, but one of them did something about it. Several years ago, Ed Butowsky, a well-known financial advisor, developed an index of his own, and dubbed it the “Chapwood Index.” His methodology remains consistent over time, and his price level tracking has shown the government’s CPI measure to have dramatically understated the rising cost of living.
The Chapwood Index, which is computed twice annually, has been released for 2019’s first six months. The Chapwood Index conclusion is mind boggling, showing the average price level rise in the USA to be 9.8% for 6 months.
In the meantime, couldn’t we at least ask for consistency among the government’s applications of the CPI? Somehow, the system seems to be working against our best interests. The 3.68% expanded tax brackets are welcome, but the 1.6% “cost-of-living” increase seems a bit paltry by comparison. Neither respects the Chapwood Index’s 9.8% increase for only 6 months.
For more information, go to the Chapwood Index website and read the history, methodology, and results. It is an eye-opener.
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