It was the Senate Finance Committee that came up with the current system -- from wikipedia:
In 1995, the Senate Finance Committee, appointed a commission to study CPI's ability to estimate inflation. The CPI commission found in their study that the index overestimates the cost of living by a value between 0.8 to 1.6 percentage points. Because the CPI is so widely used as an inflation adjustment, the fact that it is overestimated, even by such a small percentage, has several consequences.
The fact that CPI overestimates inflation suggests that claims that real wages have fallen over time are possibly unfounded. Additionally, it would suggest that real GDP growth, which is calculated using the CPI, is severely underestimated. An overestimation of only a few percentage points compounds over time. In the 1970s and 80s the Federal Government began indexing several transfers and taxes including social security (see above Uses of the CPI). The overestimation of CPI would imply that the increases in these taxes and transfers have been greater than necessary, meaning the government and taxpayers have over paid for them.
The Commission concluded that more than half of the overestimation was due to slow adjustments in the index to new products or changes in product quality. Because the index weights are only adjusted once every ten years, the CPI does not account for new technologies that are adapted by consumers quickly. For example, by 1996 there were over 47 million cellular phone users in the United States, but the weights for the CPI did not account for this new product until 1998. This new product lowered costs of communication when away from the home. The commission recommended that the BLS update weights more frequently than ten years to prevent new products from causing upward bias in the index.
Additional upward biases come from several sources. Fixed weights to do not accommodate consumer substitutions among commodities, such as buying more chicken when the price of beef increases. Because the CPI assumes that people continue to buy beef, it would increase even if people are buying chicken instead. The Commission also found that 99% of all data were collected during the week, although an increasing amount of purchases happen during the weekend. Additional bias stems from changes in retailing that is unaccounted in the CPI. [5] |
