Inflating Political Tensions: The Issue of Indexing Inflation

By Rachel Pomerantz

Rachel Pomerantz is a rising sophomore at the University of Pennsylvania.

Ben Franklin famously said, “In this world nothing can be said to be certain, except death and taxes.” While the existence of taxes is certainly a certainty, how much you will pay is anything but. Taxes are but one of the many areas that the issue of inflation impacts at both a federal and state level.

The federal government and some state governments adjust monetary amounts to compensate for inflation. As defined by the Bureau of Labor Statistics, inflation is “a process of continuously rising prices or equivalently falling value of money.” [1] For example, if the annual inflation rate is 5%, then $100 in one year is worth the same amount as $105 the next year. Since most countries formulate public policy to combat positive inflation, policymakers are thus concerned with combatting the decreasing value of money it causes.

Central banks and other havens of monetary policy usually try to control inflation by setting target levels of inflation and then using open-market operations to achieve them. Retroactively, policymakers adjust or debate the possibility of adjusting monetary levels, a process called indexing, in order to correct for inflation’s impact on factors such as the minimum wage, income tax brackets, entitlement programs’ cost of living adjustments, and poverty alleviation.

For example, if the federal government did not index income tax bracket levels to inflation, then as wages generally rose with inflation, more income would be pushed into higher tax brackets, compounding the effects of inflation by charging overly high tax bills.

The debate surrounding indexation can be divided into multiple tiers: First, whether the federal government should index monetary values to inflation, and second, what metric the government should use for indexing programs.

Those who support indexation point out that allowing the minimum wage or food stamps to keep pace with the real value of goods and services upholds the intention of the law by preserving the real value present in the original legislation. Additionally, this saves time and legislative action by automatically implementing updates to these values that the legislature would irregularly pass only when they chose to do so. For example, the federal minimum wage (currently $7.25) is not indexed to inflation and would have to be increased by 50% to keep pace with the inflation that has occurred since the minimum wage was implemented in 1938. [2]

Furthermore, indexing government programs and certain wages would absolve legislators of taking politically unpopular votes such as raising Congressional salaries to keep pace with inflation. While this might not be a morally sound argument for indexation, it is a reality of a political body.

Secondly, we must consider how the government actually determines the appropriate level of indexation. The logical first answer is to use the Consumer Price Index (CPI) published by the Bureau of Labor Statistics, but there are multiple iterations of the CPI, including the C-CPI, CPI-U, and CPI-W. [3] Additionally, some have argued that inconsistencies and a lack of transparency exist in how the CPI indices are calculated.

Admittedly, the intricacies of indexing federal and state programs to inflation do not present themselves as a fascinating and engaging issue. However, an effective and equitable adjustment of government programs based on inflation can ensure fair implementation of our laws, a goal that is certainly worthy investing time and energy to pursue.


[1] "Consumer Price Index Frequently Asked Questions." U.S. Bureau of Labor Statistics. December 2, 2015. Accessed June 14, 2016. http://www.bls.gov/cpi/cpifaq.htm.
[2] Elwell, Craig. Inflation and the Real Minimum Wage: A Fact Sheet. Report no. 42973. Congressional Research Service. Accessed June 14, 2016. https://www.fas.org/sgp/crs/misc/R42973.pdf.
[3] Nuschler, Dawn. Inflation-Indexing Elements in Federal Entitlement Programs. Report no. 42000. Congressional Research Service. Accessed June 14, 2016. http://fas.org/sgp/crs/misc/R42000.pdf
[4] Boring, Perianne. "If You Want To Know The Real Rate of Inflation, Don't Bother With the CPI." Forbes. February 3, 2014. Accessed June 15, 2016. http://www.forbes.com/sites/perianneboring/2014/02/03/if-you-want-to-know-the-real-rate-of-inflation-dont-bother-with-the-cpi/#9c6b13b118b7.

The opinions and views expressed through this publication are the opinions of the designated authors and do not reflect the opinions or views of the Penn Undergraduate Law Journal, our staff, or our clients.

Photo Credit: Flickr User Pictures of Money