Chain Weighted Inflation

A chain-weighted inflation measure takes into account changes in both price and spending patterns. A chain-weighted inflation index measures both changes in the price of goods but also reflects changes in the number of goods bought.

• ex. people make substitutions in their purchases as prices rise
  • surely this must be highly dependent on the example, and lower earners must be more subject to it. It's conceivable to believe if money is tight you will substitute beef for chicken, but it's difficult to imagine even a middle class family making that sacrifice.

Chain-weighted inflation measures tend to give a lower inflation rate than standard inflation rates.

• This is because if goods go up in price, you buy less of them.

However, in the traditional measure of CPI, the weights are not changed often (at a minimum once/year)

A US federal law passed in 2017 applied the chain-weighted CPI instead of primary CPI for adjusting the incremental increases in income tax brackets. By switching to this metric, the increases on tax bracket adjustments will be comparatively smaller each year. This move to chain-weighted CPI is expected to push more citizens into higher tax brackets over time, thereby increasing the taxes they owe and, in turn, increasing the tax revenue collected by the Internal Revenue Service (IRS).

between January 2000 and April 2021, primary CPI increased by 57.6 percent, but chain-weighted CPI only increased by 49.6 percent.

Onions and shallots example

Imagine we have shallots and onions which are both $2.00/kg. At this price, we buy 2kg each (4kg total; $8). Now imagine that the price of shallots increases to $3.00. If onions and shallots were the only item in the basket of goods, it would imply a 25% rate of inflation. However, what would more likely happen is that people would just start buying less shallots and substitute them with onions. Looking from this lens, we would say that inflation is actually 0%.

• A chain weighted inflation measure would take into account the fact you no longer buy shallots.