PCE deflator

Inflation Policy

Inflation in the United States remains at levels that most people don’t really notice. Overall, the consumer price index rose 2.8 percent from May 2017 to May 2018. And, when you look at core measures, the trend is still below 2 percent.

With inflation and inflation expectations still so benign, it is no wonder that despite solid economic growth and the lowest unemployment rate in 50 years the Federal Open Market Committee continues to act quite gradually (see their June 2018 statement). Inflation could well turn up in the near term—perhaps by more than the policymakers expect. But, for reasons that we will explain, if we were on the FOMC, we would stay the planned course: remain vigilant, but certainly not panic.

We start with a look at the data. What we see is that trend inflation has stayed reasonably close to the Fed’s medium-term target of 2 percent for the past two decades. There have been occasional deviations, like the temporary rise in 2008 and again in 2011, but overall, the path is remarkably stable….

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Policy and Measurement

Policy, especially monetary policy, is about numbers. Is inflation close to target? How fast is the economy growing? What fraction of the workforce is employed?  And, what is the relationship between the policymakers’ tools and their objectives? Answering all of these questions requires measuring a broad array of economic indicators, with consumer prices high on the list. In this post, we discuss some of the pitfalls in measuring prices.

Price indices of the sort that we use today have been around since the late 19th century. In the United States, near the end of World War I, the National Industrial Conference Board starting constructing and publishing a cost-of-living index. This work was eventually taken over by the Bureau of Labor Statistics (BLS). Over the past century, the theory of price indexes (see, for example, here and here) and the means of measurement have both moved forward substantially.

With the advent of inflation targeting, price indices have taken on a new prominence. If monetary policymakers are going to focus on controlling inflation—setting numerical targets for which they are then held accountable—then the construction of the price index itself becomes an issue. What is included and how can become critical to the way policy is conducted and to the achievement of the stated objective, namely price stability....

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Are we overestimating inflation (again?)

Twenty years ago, a group of experts – the “Boskin Commission” – concluded that the U.S. consumer price index (CPI) systematically overstated inflation by 0.8 to 1.6 percentage points each year. Taking these findings to heart, the Bureau of Labor Statistics (BLS) got to work reducing this bias, so that by the mid-2000s, experts felt it had fallen by as much as half a percentage point.

We bring this up because there is a concern that as a consequence of the way in which we measure information technology (IT), health care, digital content and the like, the degree to which conventional indices overestimate inflation may have risen...

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