What Is Chained CPI and How Does It Affect Your Taxes?

The Chained Consumer Price Index, or C-CPI-U, is an alternative measure of inflation published by the Bureau of Labor Statistics (BLS). Unlike the more traditional Consumer Price Index for All Urban Consumers (CPI-U), the Chained CPI accounts for shifts in what people buy as prices fluctuate. This provides a different picture of how the cost of living changes over time. The federal government uses this metric to adjust various parts of the tax code for inflation.

The Principle of Consumer Substitution

The core theory behind the Chained CPI is consumer substitution, which observes that people change their purchasing habits in response to price changes. For example, if the price of beef increases while chicken remains stable, many shoppers will buy more chicken and less beef. Their total spending on groceries does not increase as much as it would have if they had continued to buy the same amount of beef.

Traditional inflation measures like the CPI-U use a fixed “basket” of goods and services with expenditure data that is updated annually. Because this basket does not immediately account for the switch from beef to chicken, it can show a higher rate of inflation than what consumers are actually experiencing.

This discrepancy means a fixed-basket index may overstate the true increase in the cost of living. The Chained CPI was developed to address this “substitution bias” by capturing these real-world adjustments. By factoring in consumer substitution, the C-CPI-U aims to present a more refined measure of inflation’s impact on household budgets.

How Chained CPI is Calculated

The calculation of the Chained CPI differs from the CPI-U in how it handles the basket of goods. While the CPI-U updates its market basket’s expenditure weights annually, the C-CPI-U updates its basket monthly to reflect the latest consumer spending patterns.

The Chained CPI calculation uses a geometric mean formula. The BLS calculates two initial inflation measures: one using spending patterns from the previous period and another using patterns from the current period. The final index is an average of these two, “chaining” the months together to create a continuous series.

This methodology results in a two-stage release process. An initial C-CPI-U figure is published monthly but is subject to revision. A final figure is released 10 to 16 months later once more complete spending data is processed, which contrasts with the CPI-U that is released monthly as a final, unrevised estimate.

Impact on Federal Tax Provisions

The Tax Cuts and Jobs Act of 2017 (TCJA) mandated the use of Chained CPI for adjusting federal tax provisions, replacing the traditional CPI-U. Because the C-CPI-U generally rises at a slower pace, this has an ongoing effect on taxpayers. This change is a permanent provision of the TCJA, unlike other major individual tax changes from the act that are scheduled to expire at the end of 2025.

This slower growth rate impacts “bracket creep,” where inflation pushes taxpayers into higher tax brackets even if their real purchasing power has not increased. Because the C-CPI-U adjusts tax bracket thresholds upward by smaller amounts each year, taxpayers may move into higher brackets more quickly, resulting in a higher tax liability over time.

The TCJA also applied this indexing method to other parts of the tax code. Annual adjustments for the standard deduction, the Earned Income Tax Credit (EITC), and other tax credits and their income phase-out thresholds are tied to the Chained CPI. Consequently, the value of these deductions and credits grows more slowly, reducing their benefit to taxpayers over the long term.

Application to Government Benefit Adjustments

The use of Chained CPI is also discussed for adjusting government benefits, which would slow the growth rate of payments. When benefits are indexed to inflation, the measure determines the annual Cost-of-Living Adjustment (COLA). Using the Chained CPI would result in smaller COLAs compared to indices like the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is used for Social Security.

Switching to the Chained CPI for Social Security COLAs has been a recurring proposal. Over many years, the cumulative effect of smaller annual adjustments would lead to a noticeable reduction in the total benefits received compared to the current method.

While the TCJA enacted the change for tax provisions, the switch has not been made for Social Security COLAs. Proponents argue it maintains purchasing power more accurately, but the dollar amount of benefits would grow more slowly. This has made its potential application to benefits a subject of ongoing policy debate.