What You Need to Know About ‘Chained CPI’

Most people have heard of CPI -- the Consumer Price Index, a commonly cited U.S. government measure of how the cost of living is going up (inflation) or down (deflation). But CPI comes in different flavors, and one, called chained CPI, is having a moment in Washington, as the U.S. Congress tries to pass a tax cut that doesn’t break the bank.

It’s a variant of the traditional CPI. Both are reported monthly by the U.S. Labor Department’s Bureau of Labor Statistics, and both track the prices of a "basket" of 80,000 goods and services bought by consumers in urban areas. But chained CPI adjusts for what’s known as substitution bias by recognizing that consumers tend to shift their purchasing behavior as the relative prices of things change. For example, when the price of Granny Smith apples increases, people may buy Gala apples instead. As a result, chained CPI shows a slower pace of price gains, or inflation, than traditional CPI. The gauge’s official name is the Chained Consumer Price Index for All Urban Consumers, or C-CPI-U.