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The Consumer Price Index: How It Impacts the Federal Budget and Social Security Benefits

The Consumer Price Index (CPI) measures the average change over time in prices paid by urban consumers for a representative market basket of goods and services. It is an important economic indicator that tracks changes in the cost of living over time. The uses of the CPI directly affect the income of many Americans. The CPI is used to adjust income payments, such as Social Security benefits; to adjust income eligibility levels for government assistance programs; to adjust tax brackets and many features of the individual income tax; and to provide cost-of-living wage adjustments in the private sector.

This Fact Sheet by Selena Caldera of AARP's Public Policy Institute Economics team describes four price indexes published by the Bureau of Labor Statistics and discusses differences in the methodology used to derive them. These differences can have a large effect on federal revenues and outlays, including Social Security benefits. These effects are detailed and projected cost-of-living adjustments to Social Security benefits through 2011 are discussed. (9 pages)