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Chained CPI Impact

Posted: Thu Jan 11, 2018 10:15 pm
by Bonnan
With the new tax bill revising how the CPI is calculated; will this impact the future performance of the VIPSX Inflation Protected Securities Fund?

Re: Chained CPI Impact

Posted: Thu Jan 11, 2018 10:17 pm
by AlohaJoe
Bonnan wrote:
Thu Jan 11, 2018 10:15 pm
With the new tax bill revising how the CPI is calculated; will this impact the future performance of the VIPSX Inflation Protected Securities Fund?
Why would it?

The tax bill didn't revise how CPI is calculated.

It also didn't change how adjustments to TIPS are made.

Re: Chained CPI Impact

Posted: Thu Jan 11, 2018 10:42 pm
by Silk McCue
Chained CPI in the new tax bill is applied to the annual expansion of the tax brackets. It is not a new standard applied globally in place of CPI.

Re: Chained CPI Impact

Posted: Fri Jan 12, 2018 9:23 am
by carolinaman
Silk McCue wrote:
Thu Jan 11, 2018 10:42 pm
Chained CPI in the new tax bill is applied to the annual expansion of the tax brackets. It is not a new standard applied globally in place of CPI.
I think chained CPI will also be used for determining SS benefit increases.

Re: Chained CPI Impact

Posted: Fri Jan 12, 2018 1:05 pm
by OkieIndexer
Somewhat off-topic, but the only thing that matters for one's retirement portfolio as far as inflation goes is your personal inflation rate, e.g. the rise in your own personal expenses from year to year. The official CPI doesn't matter (aside from SS, pension, TIPS, etc. increases tied to the official CPI), which has all kinds of "interesting math" involved such as substitution effects; it's a national average CPI anyway...inflation is higher in some cities than others.

Re: Chained CPI Impact

Posted: Fri Jan 12, 2018 1:21 pm
by CAsage
It's my understanding that using (new) the Chained CPI will lead to a gradual overall bracket creep, wherein the tax brackets will be adjusted more slowly, and therefore increase tax revenue. What they say is an acceptable substitution effect can be a viewed as a decrease in quality of consumption. I think SS is based on the CPI-W (workers), which does not reflect the medical inflation most seniors. Quite an interesting finely attuned distinction.

Re: Chained CPI Impact

Posted: Fri Jan 12, 2018 5:20 pm
by Silk McCue
carolinaman wrote:
Fri Jan 12, 2018 9:23 am
Silk McCue wrote:
Thu Jan 11, 2018 10:42 pm
Chained CPI in the new tax bill is applied to the annual expansion of the tax brackets. It is not a new standard applied globally in place of CPI.
I think chained CPI will also be used for determining SS benefit increases.
I didn't search the web exhaustively but I find no reference to Chained CPI being applied to SS benefit increases in this tax bill. I think the world would have been on fire politically had that been on the table. The topic has been discussed for years and may someday see a change but not today.

Re: Chained CPI Impact

Posted: Fri Jan 12, 2018 7:02 pm
by nisiprius
Executive summary: a) it doesn't affect TIPS, because it doesn't affect CPI-U itself. b) In any case, the difference between CPI-U and C-CPI-U is on the order of maybe 0.25%, so if it did affect VIPSX, which it doesn't, it would no worse than changing from VIPSX (expense ratio 0.20%) to Fidelity Inflation-Protected Bond Index Fund, FINPX, ER 0.45%.

The tax bill applies chained CPI to tax brackets. Certainly it is reasonable to suppose that if it is used in one place it might be used in others. However:

a) Certainly one can compound it out, but it is a small change. Over the time it's been computed, it's been IIRC something like 0.2% to 0.3%/year lower than C-CPI-U. In this chart, for example, we see it lagging CPI-U by a cumulative 2.1% over ten years, or 0.21% per year.

https://www.bls.gov/osmr/pdf/st130020.pdf
Image

b) It has not (yet?) been proposed to apply it to Social Security, which uses a different CPI, CPI-W.

c) The language of the tax bill see p. 10 uses the term "C-CPI-U." It didn't order the BLS to change the calculation of C-CPI. Apparently the BLS will continue calculating two different indexes, CPI-U and C-CPI-U and the government will decide which to use for which purposes.

d) Since TIPS are indexed to CPI-U, nothing in the tax bill and nothing announced by the BLS would affect TIPS.

e) Here's the interesting bit, although I don't know how far I would trust it. The TIPS language here says:
"If, while an inflation-protected security is outstanding, the CPI is (1) discontinued, (2) in the judgment of the Secretary, fundamentally altered in a manner materially adverse to the interests of an investor in the security, or (3) in the judgment of the Secretary, altered by legislation or Executive Order in a manner materially adverse to the interests of an investor in the security, Treasury, after consulting with the BLS, will substitute an appropriate alternative index."

Re: Chained CPI Impact

Posted: Fri Jan 12, 2018 8:12 pm
by Phineas J. Whoopee
carolinaman wrote:
Fri Jan 12, 2018 9:23 am
Silk McCue wrote:
Thu Jan 11, 2018 10:42 pm
Chained CPI in the new tax bill is applied to the annual expansion of the tax brackets. It is not a new standard applied globally in place of CPI.
I think chained CPI will also be used for determining SS benefit increases.
It's been proposed repeatedly but so far there's been little legislative support. I think this topic must fall under the category of proposed legislation.

It certainly is true that C-CPI-U, which the BLS already calculates, has risen, and structurally can be expected to rise, more slowly than the nonchained version in both its -U and -W variants.

The difference is the CPI-U and -W models suppose consumers will alter their choices within methodology-defined categories, whereas C-CPI-U also supposes they will alter their choices across categories. Naturally it will rise more slowly.

If anybody wanted to it would be easy to construct a C-CPI-W.

The Fed's preferred measure, the Personal Consumption Expenditures price index, calculated by the Department of Commerce, already is chained.

PJW