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Inflation Adjustment

Inflation Adjustment

Generally, amounts of tax brackets, standard deductions, personal exemptions, and various other tax figures are annually adjusted for inflation. Under old law, the inflation measure was Consumer Price Index for all urban customers (CPI-U). Under new law for years beginning after December 31, 2017, they will be using Chained Consumer Price Index for All Urban Consumers (C-CPI-U), permanently. The Bureau of Labor Statistics first began publishing the C-CPI-U in August 2002.

There have been comments that C- CPI-U grows slower than CPI-U. This means that the future indexed numbers will be smaller than would have been under the old law. The Bureau of Labor Statistics has compared the two and posted the following conclusion:

 

Conclusions

1- Unexpected negative differentials between Regular CPI and Chained CPI results at some aggregate levels below the All US–All-Items level continue to be observed.

 

2- The non-uniformity of the observed anomaly in the new 2004 data makes conclusions about why certain Superlative indexes are producing higher 12- month price changes highly problematical.

 

3- Several explanations for the anomaly are offered for consideration.

(a)Variability of weights, which might explain the situation in the C-Size Cities sector;

(b) The actual elasticity of substitution behavior may be driving the unexpected differentials between the two indexes;

(c) Lower or even negative inflation levels may be influencing the observed anomalies; and,

(d) Given certain price (or index) levels and certain rates of increases, there is a mathematical result which finds an index using a Geomeans formula (like the Superlative’s Tornqvist) perforce higher than an index using a Laspeyres formulation, no matter what the weights themselves might be.

 

4- No one explanation has been found to account for all the occurrences of the observed anomaly.  For more detailed visit the Bureau of Labor Statistics: https://www.bls.gov/osmr/pdf/st060220.pdf

 

Zaher Fallahi, Tax Attorney, CPA, is a Tax Controversy Attorney, and defends taxpayers in resolving their Income Tax and Offshore Accounts (FBAR and FATCA) problems. Telephones: (310) 719-1040 (Los Angeles), (714) 546-4272 (Orange County), e-mail taxattorney@zfcpa.com