The fallacy of the "chained" CPI - it's chained to your paycheck!

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1. exactly!

part of the academic economist's rationalization for this is that if "inflation" is meant to measure ALL price increases in the economy, then labor costs should be reflected too. if everything went up by 5% except your paycheck, well then, not everything went up by 5%, did it? so for the ENTIRE economy, it went up by a bit LESS than 5%.

the problem with this, of course, is that the policy PURPOSE of inflation is to measure not price increases across the entire economy, but to measure price increases that consumers actually face. most consumers don't directly employ others, and so don't benefit from less inflation in labor costs.

the substitution effect in chained cpi measures not inflation, but the way people COPE with inflation when their paycheck doesn't grow as quickly as consumer prices.