A Faulty Gauge for Inflation

July's stunning 15.4% annual rise in the consumer price index dramatized anew a serious flaw in the way the Government measures inflation. The Bureau of Labor Statistics calculates the consumer price index on the basis of the price of a variety of goods and services that an average family buys during a month. Housing costs account for 25.8% of the CPI, since that is how much of its budget a typical family spends on shelter. A sharp jump in mortgage rates, such as has occurred in the past few months, can thus have an important effect on the level of the CPI.

But less than 10% of American families buy houses or take out new home loans in a year. The rest of the population are not directly affected by the higher housing costs, and the CPI overestimates the effect of inflation on them.

Small changes in the CPI are important. More than 9 million American workers receive cost of living wage increases linked to rises in the CPI, and the benefits paid to 36 million Social Security recipients are tied to the index. A one-point increase in the CPI means nearly $3 billion in additional Government spending.

The Bureau of Labor Statistics is working on several ways to solve the problem. The most widely discussed proposal is a new index, dubbed CPI-U-X1, that calculates hypothetical increases in the rent on a home, rather than the purchase price, during a month. If that index had been used in July, the annual rise in consumer prices would have been 10%, instead of 15.4%.

President Reagan's economic advisers admit that the Government should change the CPI, but they hesitate to do it now. They argue that whenever mortgage rates finally drop, the CPI will fall rapidly and automatically cut back Government spending. Says a top Treasury official: "We want to jump off the CPI at the bottom, not at the top." In the meantime, the consumer price index will continue to be like a thermometer that does not give the right temperature.

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