Submitted by Joseph Carson, former chief economist at AllianceBernstein
At this week’s Fed’s annual Jackson Hole conference Federal Reserve Chairman Jerome Powell is expected to announce a new policy approach that is intended to give policymakers more flexibility and time to achieve their inflation mandate. The irony is the proposed change is not necessary as the inflation mandate has been met. The problem is policymakers are not aware of it.
Inflation Measurement
The Federal Government statistical branches publish several measures of inflation. Among the most important are the consumer price index (CPI) and the personal consumption deflator (PCE). Accuracy is the most important criterion of inflation measurement, and both the CPI and PCE fail badly on this basic principle.
The use of non-market prices creates accuracy problems for both measures. Both measures base their estimates of housing inflation on what people would pay to rent their house, and not based on actual transaction prices.
But the PCE, which gets 70% of its prices from the CPI, also includes items or services provided to people by business and government. That creates another measurement issue because these items are not “sold” to the consumer.
This runs counter to the basic tenet of inflation measurement. That is inflation indexes are meant to capture what people pay for something, not what they may, could, or will pay.
Source: Tyler Durden | ZeroHedge
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