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 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.
The “Increase Rate for Federal Tax Tables/Exemptions” option is available under Taxes section, File Status / Options tab of the scenario data.
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:
- What You Need to Know About ‘Chained CPI’ by Sho Chandra, Bloomberg QuickTake, November 2017.
- Beware the Chained CPI Link in the New Tax Law by Bernice Napach, ThinkAdvisor, January 2018.
- Improving initial estimates of the Chained Consumer Price Index by U.S. Bureau of Labor Statistics (BLS), February 2018