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New Tax Law Takes Aim at a Different Measure of Inflation

Jan 4th 2018
inflation check

As we make an auspicious start in the new year with a new tax law, let’s look at one bit of information from that law that related to the consumer price index — basically what the tax implications would be from changes in utilizing measures of inflation. Here is that passage:

For tax years beginning after Dec. 31, 2017 (Dec. 31, 2018 for figures that are newly provided under the Act for 2018 and thus won't be reset until after that year, e.g., the tax brackets set out above), dollar amounts that were previously indexed using CPI-U will instead be indexed using chained CPI-U (C-CPI-U). (Code Sec. 1(f), as amended by Act Sec. 11002(a)) This change, unlike many provisions in the Act, is permanent

Was I the only one who saw this in the codification of the new tax law and smiled? It’s time for all the macroeconomics geeks to have their moment. I am one of them, having minored in economics. This seems so small, but it really isn’t.

Let’s take a moment and give you the definition of inflation:

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.

So, what is CPI-U and C-CPI-U anyway? CPI-U is an acronym for Consumer Price Index for All Urban Customers, and C-CPI-U is Chained Consumer Price Index. What does this mean and why should you care?

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