4. Translation from page.

Translate from page the passage expanding on the subject of the text.

Is the cpi biased as a payment escalator?

If the CPI precisely doubles, do typical consumers lose unless their money incomes at least double? Contrary to most people's intu­ition, the answer is no.

Not every price increases 5% if the CPI jumps 5%. Some mone­tary prices would rise faster and some slower when weighted aver­ages of prices rise 5%. Relative prices rise for goods for which money prices rise faster than aver­age, but the relative price actually falls for any good for which the money price does not rise as fast as average. For example, if average prices rise 5% while monetary prices for color TVs go up only 1 %, the relative cost of a TV has fallen roughly 4% (compared to the prices of most goods).

The law of demand is a key for predicting how people respond to such changes in relative prices. Consumers will buy less of goods for which prices rise faster than average (i.e., those with increased relative prices) and more of goods for which monetary prices fail to keep pace with the CPI (i.e., those whose relative prices have fallen). But how do consumer responses to such changes in relative prices affect the CPI's accuracy as a pay­ment escalator?

An increase in monetary income precisely equaling the CPI would ensure that typical consumers could buy exactly the same bun­dles of goods as they purchased prior to the increase in the price level. But would they? No. The new set of relative prices would guide them to select different bun­dles which these individuals must prefer to the old (still affordable) ones they would now forgo. Therefore, typical consumers would gain more satisfaction— and thus, subjectively, more real income—if each rise in the CPI triggered precisely proportional escalation of their monetary incomes.

The lesson here is that payment escalation exactly equal to the per­centage change in the CPI more than offsets any losses from inflation. The payees would gain. But escalator clauses are intended only to ensure payees no losses from inflation; they are not intended to systematically improve the lot of typical payees. In recognition of these consumer adjustments, most escalator clauses are now activated only with a lag to offset this poten­tial gain, or they are some fixed proportion of the CPI change, for example, 80%.

Congress has begun adjusting the CPI downward as a cost-of-living escalator for Social Security and other federal transfer pay­ments. However, income tax rate structures use the unadjusted CPI to escalate the income brackets to which specific tax rates apply*. Thus, most taxpayers now gain from inflation because effective real tax rates are reduced when adjustments for a changed CPI are made. 2193 digits

*Note that U.S. in­come taxes are somewhat progressive: a higher income activates higher mar­ginal tax rates on incremental income.