US character test: sticking to austerity while prices rise

Americans have fresh evidence of the continuing virulence of inflation and of its ballooning effect on the cost of running the huge United States government. Billions of extra dollars will pour out of the US Treasury in transfer payments to millions of Americans as the consumer price index (CPI) rises.

This makes for hard choices, in the wake of news that the CPI soared 1.4 percent in March to complete the first quarter of the year at an 18.1 percent annual clip.

Among problems which President Carter and congressional leaders must consider in coming months:

* Should government spending be cut to combat inflation, as Mr. Carter now proposes, even though pockets of recession have hit the US economy?

Already the President, while clinging to his goal of balancing the fiscal 1981 budget, is releasing extra funds to help American farmers and the construction and the housing industries.

A powerful voice in favor of continuing austerity belongs to Federal Reserve Board chairman Paul A. Volcker, who says, "We are not now at a stage for stimulation, because we still have inflation to deal with."

Mr. Volcker, like Carter administration officials, holds out hope for lower inflation later this year, if energy and housing costs cool off.

* Should the formula by which social security benefit payments are fully indexed to the CPI be changed?

Beginning this July, 35 million social security recipients will find their monthly checks fattened by 14.3 percent, the amount the CPI rose in the first quarter of 1980 over the same period of last year.

Social security payments, plus supplementary benefits paid to 4 million blind , disabled, and aged poor Americans, rise automatically in tandem with the consumer price index.

This increase, plus boosts for food stamp recipients and military and civil service retirees, plays havoc with the efforts of White House and Congress to balance the vast federal budget.

This year's social security increase, the largest since Congress tied benefit payments to the CPI, will add nearly $17 billion to the government's annual outlays.

Direct benefit payments to individual Americans -- most of which are indexed to inflation -- swallow 43 cents of every budget dollar, compared with 24 cents for military spending.

Next year, to support these rising costs, the top social security tax paid by working Americans will rise to $1,975.05, compared with $1,587.67 this year and

All this seems bound to revive the debate over whether to change the formula by which social security benefit payments are indexed to the CPI.

Only 6 percent of Americans buy or sell a house in any one month, according to government officials. Yet the CPI gives disproportionate weight to the selling price and mortgage costs of homes. This factor alone has raised the index by nearly 3 percent in recent months.

Removing this distortion would lower the inflation rate, as measured by the CPI, and reduce the annual increase in social security payments.

This is a highly sensitive issue, since such a solution would hurt elderly people on fixed incomes, most vulnerable to economic distress.

"I would be very reluctant to tamper with the CPI," says chief White House inflation fighter Alfred E. Kahn, "because it is an accurate measure of what consumers are paying for the listed items."

Mr. Kahn suggests that the Department of Labor might issue a second measure -- a true cost-of-living index, giving each category of purchase its proper weight.

Thus, the housing item of the CPI -- while accurate for what a small minority of Americans is paying for houses during a given month -- would not bulk large in a true cost-of-living index, measured across the economy.

This second index, Mr. Kahn says, might be the proper one to which to link social security.

Elderly Americans, meanwhile, will need their extra income from social security, because the cost of necessities -- food, energy, housing, health care, and clothing -- is climbing faster than the overall 18.1 percent annual pace of the CPI.

Thus, the heaviest inflation burden falls on lower-income Americans, who traditionally spend a greater share of their money on goods and services which they must have.

A disturbing element in March was a 1.1 percent surge in grocery store prices , reflecting higher costs for sugar, beef, eggs, and fresh fruits and vegetables. Grocery prices had declined in January and February.

Real income for millions of Americans continues to decline, standing in March 7.9 percent lower than a year ago for an "average" urban blue-collar worker with a nonworking wife and two children.

In fact, millions of wives also work, partly to keep their families abreast of inflation and to pursue the American dream of a higher standard of living.

Rising social security taxes doubly punish the two-income family, for both husband and wife pay separate payroll taxes. In addition, filing a joint income tax return means, in effect, that the wife's wages are taxed at a high rate.