A CPI-Futures Market

If governments cannot control inflation, consumers must learn to live with it, however difficult that may be.' But the task of adapting to the uncertainties of inflation could be eased by the development of appropriate forward markets. Commodity futures provide a hedge against fluctuations in the price of a limited menu of commodities ranging from plywood to frozen orange juice and pork bellies. And in the foreign exchange market, it is possible to hedge against future changes in the value of the dollar vis-a-vis other currencies. Why not extend the concept of a futures market to provide a means of hedging against fluctuations in the general price level, as measured by the market basket with which the Bureau of Labor Statistics constructs the consumer price index. A CPI-Future is a promise to pay a sum of money sufficient to buy, at a specified maturity date, a BLS market basket of goods which would have cost $1.00 if it had been purchased in the 1967 base year. Anyone who buys a CPI-Future through his broker will receive at maturity a sum of money equal to whatever the CPI turns out to be at that date; and at maturity the buyer will pay at the price determined in today's market for CPI-Futures. Conversely, the seller of a CPI-Future promises to deliver a specific amount of purchasing power, however many dollars that may turn out to be, in return for the number of dollars specified when the CPI-Future was sold. For example, if the equilibrium price of CPIFutures maturing 1 year hence is 130 when the CPI stands at 125, it means that next year's dollars are depreciated in the market place by 4 percent vis-h-vis the present. It also means that the buyer of a CPIFuture is guaranteed however many dollars are required to buy as much as $1.00 would have purchased in 1967; he has bought certainty.2