An Analysis of the Effects of Indexing for Inflation on Federal Expenditures

PAD-79-22: Published: Aug 15, 1979. Publicly Released: Aug 15, 1979.

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Inflation has become a national preoccupation, and until it is eliminated, methods must be sought to live with it. Indexing is one method of coping with inflation, and this procedure is used to protect the benefits provided by Federal programs from erosion by inflation. The indexing of Federal expenditures is a useful practice, and a large and growing proportion of the Federal budget is indexed. However, indexation appears to contribute to inflationary pressures by automatically increasing Federal expenditures during inflationary periods.

The most commonly used index is the Bureau of Labor Statistics' Consumer Price Index, which is computed by calculating the cost of a fixed group of goods and services. When its cost rises, the Index is increased proportionately. Increased Federal expenditures result from an increase in the real value of benefits per person, or from an increase in the number of people receiving benefits. Among the 12 programs examined, expenditures for the indexed programs generally were increasing faster than other Federal outlays. While indexing is not likely to affect the growth in Federal expenditures in the long run, in the short run indexing may affect expenditure priorities such as allocating more to indexed programs thereby limiting the funds available for programs that are not indexed. Given the large and growing share of the budget accounted for by indexed programs, it would be difficult to reduce substantially the growth in total Federal spending without some check on programs which are indexed. A successful anti-inflation program will require that many steps, including some modification in Federal indexing, be taken.

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