Bankers and investors can expect lower interest rates if the consumer price index is adjusted to stop overstating inflation.

A government commission asserted last week that the current CPI exaggerates inflation by 1.1 percentage point and recommended that it either be repaired or replaced by a more accurate index.

"Definitely we would see rates come down over time," said Wayne M. Ayers, chief economist at Bank of Boston Corp. "But remember that this isn't a new charge concerning the CPI, so the bond market may already be discounting some of the overstatement."

Anthony Chan, chief economist at Banc One Investment Advisors, also said he anticipates lower rates if the index is changed. He is skeptical that the market is now factoring in much CPI exaggeration.

"When you ask, you find that many people really don't understand the issues involved," he said, "so you have to doubt how much the market could be taking this into account."

Will the CPI actually be recalculated? The impact of such a change would be so profound that politicians in Washington, from President Clinton on down, are handling the matter with kid gloves.

An estimated one-third of all federal spending is indexed to the CPI, most notably cost-of-living changes in Social Security and pension payments. Tax tables are also linked to the index. The change could dramatically narrow the budget deficit.

"I think a way to do it will be found," said Mr. Ayers, a former Federal Reserve Board economist, "although I certainly can't say when or by how much."

"Changes will be made," said Mr. Chan, who has worked at the Federal Reserve Bank of New York, "but the CPI is not going to be cut by 1.1 point."

"The impact of the commission probably is going to be to put pressure on the Bureau of Labor Statistics to hasten their own improvement of the index," said Robert G. Dederick, economic consultant to Chicago's Northern Trust Co. and a former Commerce Department economist. "The idea of Congress itself doing it is much more remote," he said.

Economists are in complete agreement about one thing: The CPI, despite how it is widely used, is not a cost-of-living index.

"We, the country, misuse the CPI," said Donald H. Straszheim, chief economist at Merrill Lynch & Co., in a call to clients this week. "It is not a cost-of-living measure, it is a fixed-weight index, and accordingly, it overstates inflation."

The CPI study group, led by Stanford University economist Michael J. Boskin, said that more than half the index's overstatement of inflation - 0.6 percentage point - is due to its failure to adjust for quality improvements in new products.

The group asserted that a further 0.4 percentage point error stems from the inability to account fully for consumer decisions to substitute cheaper products for more expensive ones - particularly food - when prices are rising. This is the so-called substitution effect.

Finally, the commission said one-10th of a point of overestimation occurs because the CPI does not gauge changes in where consumers shop.

"There isn't a great deal to argue with in what they are saying," said Mr. Dederick. "These are all phenomena we've known about, but measuring their actual magnitude is something else.

"I haven't yet read the report," he said, "but I would note that there is quality deterioration as well as quality improvement.

"And the 'substitution effect' is very tricky," he said, "The idea is that, if the price of beef goes up, I buy chicken. But if I wanted chicken, wouldn't I have bought chicken in the first place?"

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