by Carolyn Rothwell on March 29, 2018

Traditional CPI (CPI-U) vs. Chained CPI (C-CPI-U) & TOTAL's Tax Projections


The new tax law uses the Chained Consumer Price Index for All Urban Consumers (C-CPI-U), instead of the Consumer Price Index for All Urban Consumers (CPI-U) to adjust for inflation. The change to tie inflation to the Chained Consumer Price Index is one of the few provisions applying to individual taxation that is permanent.  The Chained CPI provides a lower inflation measurement by adjusting for "substitution bias" which accounts for consumers choosing a substitute good available for a lower price.

Historical Data - C-CPI-U vs. CPI-U:

Based on historical data from December 2000 to December 2015 provided by the Bureau of Labor Statistics, the average C-CPI-U was 1.89%, whereas the CPI-U was 2.16%.  The difference between the two rates is relatively small, but it does add up to higher taxes over time.

CPI_Data  


CPI Change in Financial Planning Projections:

Money Tree's in-depth financial planning software, TOTAL, increases the federal tax provisions like the tax breakpoint amounts using the "Increase Rate for Federal Tax Tables/Exemptions."  The index rate applies to TOTAL's cash-flow-based planning approach, Golden Years, which completes a detailed tax calculation each year of the projection. 


Learn more about the tax analysis in Golden Years by reviewing a full sample report or the tax reports.


The Increase Rate for Federal Tax Tables/Exemptions can be modified to reflect the impact of the tax rule change to tie tax inflation to C-CPI-U.   

TOLIndexRate

Online Edition: 
The "Increase Rate for Federal Tax Tables/Exemptions" option is available under Taxes section, File Status / Options tab of the scenario data. 

Desktop Edition: 

The "Index Rate for Federal Tax Tables/Exemptions" option is available under Tax Data section, File Status / Options tab of the scenario data. 


Informative Articles on the C-CPI-U:

2018 Tax Cheat Sheet

Click below to get a single page PDF highlighting the TCJA rule changes compared to prior law.

2018 Tax Update Cheat Sheet - Click to get PDF

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Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance of financial planning.