Question

The US Boskin Commission Report of 1996 advocated downward adjustment of the Consumer Price Index. Explain the rationale underpinning this advocacy using examples from Australia.

Answer 1

Boskin Commission was appointed by the Senate Finance Committee to look into the role of CPI in the government benefit programs as well as make recommendations for any changes required in CPI.

CPI is the consumer price index in the country which shows average weighted price of a certain basket of goods which are consumed most commonly by the residents in the country. The commissions' report released in December 1996 recommended a downward revision in the CPI of 1.1%. The commission belived that the CPI overstated inflation rate by 1.1%.

The commission's report found several biases in measurement of CPI such as being unable to account for the changing quality of goods and services and new goods coming on to the market, failing to account for rising discount stores etc.

For example, in Australia people now mostly purchase their everday consumable items from large supermarkets which provide discounts on credit card payments. Similarly, a product such as a smartphone or a laptop bought five years before even at the same price is generally less efficient and durable, which is not accounted for in measurement of CPI, thereby leading overstatement of inflation rate in the country.

Therefore, if CPI is lowered by 1.1%, it would measure inflation more accurately.