Why is it that the people responsible for pensions use the CPI as an indicator for inflation rather than the GDP deflator? Why is the CPI better?
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I believe the biggest reason is the base for each measures. CPI measures the weighted average change in prices for a market basket of consumer goods + services. The GDP deflator measures changes in prices of all goods+services included in GDP including investment and government spending.
The people responsible for pensions may use the Consumer Price Index (CPI) as an indicator for inflation because it is specifically designed to measure changes in the cost of living for consumers. The CPI reflects the prices of a basket of goods and services that are typically purchased by households. This makes it more relevant for individuals who rely on pension benefits to maintain their standard of living.
On the other hand, the GDP deflator measures changes in the overall price level of all goods and services included in the Gross Domestic Product (GDP), including investment and government spending. While the GDP deflator provides a broader perspective on inflation in the economy, it may not necessarily reflect the changes in prices that directly impact consumers.
The CPI is often considered better for pension calculations because it focuses on consumer prices, which are the prices that individuals actually experience and pay for on a daily basis. By using the CPI, pension funds can more accurately adjust benefits to reflect the rising cost of living, ensuring that retirees can maintain their purchasing power over time.
In summary, the CPI is a more appropriate indicator for pensions because it measures the specific basket of goods and services that individuals consume, while the GDP deflator measures changes in the overall price level of all goods and services included in the GDP.