Nation article on CPI index

James Devine jdevine at
Tue Sep 22 14:56:56 PDT 1998

Dear Ms. Carey:

Thank you for this information. I am confused, however. The CPI-W and the CPI-U have been around for quite awhile, the first being the CPI for nonsupervisory wage workers (I believe) and the latter being for urban employees. Are these different from the "cpi w" and "cpi u" that you mention?

Frankly, I don't think this is anything close to a big deal, now that I think about it. If the bonds were as vulnerable to inflation as is Social Security, then bondbuyers wouldn't buy as many. That would drive the price down, which would simply drive the bond yield up. So the bondholders wouldn't lose; they'd be compensated for their exposure to inflation risk. The only way they'd lose is if the gov't were to suddenly change the rules. (BTW, the inflation-indexing does not protect the "yield" but the "coupon rate." The yield, at least in normal language, is determined by supply & demand in the bond market.)

Now it may be true that the social security recipients are getting the shaft. Indeed, it seems likely. But this is because of underestimation of the inflation rate relative to the _actual_ inflation rate (whatever it is) rather than due to the premium that bondholders get.

(I am forwarding this to the lbo-talk list, where Tom and I originally posted our messages on this subject.)

At 05:18 PM 9/22/98 +0100, you wrote:
>Jim Devine & Thomas Lehman:
>The "Nation" item that refers to CPI indexes appeared in our September 21
>issue on page 7 ("News of the Weak in Review"). A new index, known as "cpi
>calculated once a year, uses cheaper items in its basket and is applied to
>Social Security COLAs and wages. The old index, known as "cpi u," calculated
>twice a year, is used for Treasury inflation bonds, and thus guarantees
>yields for bondholders while those who depend on Social Security get the
>yields—and the shaft. The first source for the story was a January 24, 1997,
>"USA Today" article, which quoted Under Secretary of the Treasury Lawrence
>Summers telling bondholders, "You're isolated from political risk." The
>of Labor Statistics, the Treasury Department and the Social Security
>Administration have the relevant data.
>Roane Carey
>Copy Chief
>The Nation

Jim Devine jdevine at &

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