Comparing measures of core inflation

Although many policymakers and analysts associate “core CPI inflation” with the CPI excluding food and energy, there are other measures of core consumer price inflation. Like the CPI excluding food and energy, these other measures typically attempt to identify the underlying trend in CPI inflation by excluding certain components subject to large relative price changes. The rationale is that unusual changes, such as the 14.2 percent increase in energy prices last year (December to December) or the 18 percent jump in tobacco prices from November to December 1998, are unlikely to be related to the underlying trend in CPI inflation.> Clark compares five different measures of core CPI inflation. He reviews the concepts underlying the idea of core inflation and the measures examined in the article. Three of the core measures have been developed in previous research, while two indicators are developed in the article. Next, he evaluates the core inflation measures by three different criteria: accuracy in tracking trend inflation, predictive content for future overall inflation, and complexity.Inflation (Finance) ; Consumer price indexes

U.S. inflation developments in 1995

In setting monetary policy in 1995, the Federal Reserve sought to promote sustainable economic growth and continued progress toward price stability. Toward those ends, the Federal Reserve adjusted the stance of monetary policy three times in 1995. In February, amid signs of increasing inflationary pressures, policy was tightened. In July and December, in response to signals of a slowing economy and abating inflationary pressures, policy was eased.> Clark reviews inflation developments in the United States during 1995. The first section examines the actual behavior of inflation over the past year. The second section examines developments in inflation expectations in 1995. The third section describes the contents and rationale of legislation introduced in Congress in 1995 that would make price stability the primary long-run goal of Federal Reserve monetary policy.> Clark concludes that inflation developments of the past year were largely favorable. Although some important inflation measures, notably the consumer price index, rose slightly relative to the previous year, inflation overall remained moderate. Moreover, expectations of inflation declined in 1995, so that future inflation is generally expected to remain near the current level. The Federal Reserve, therefore, appeared to be successful in maintaining moderate inflation during the year and in convincing the public that inflation will remain moderate in the period ahead.Inflation (Finance) ; Monetary policy

U.S. inflation developments in 1996

The primary goal of Federal Reserve monetary policy is to foster maximum long-term growth in the U.S. economy by achieving price stability over time. Price stability will be achieved, according to some definitions, when inflation ceases to be a factor in the decision-making processes of businesses and individuals. Although the Federal Reserve has made considerable progress toward price stability since the early 1980s, inflation remains above the level most analysts would associate with price stability. Because stable prices are essential to maximum long-term economic growth and living standards, the Federal Reserve seeks to contain and gradually reduce inflation until price stability is attained.> Clark reviews inflation developments in the United States during 1996 in relation to the Federal Reserve's goal of achieving price stability over time. He first examines the behavior of inflation over the past year, showing that sharp increases in food and energy prices caused most overall inflation measures to rise, while inflation in nonfood and nonenergy prices slowed. Second, he shows that expectations of future inflation held steady at about the current rate, indicating the public expects no further progress toward price stability. Finally, he evaluates some inflation measurement issues raised in 1996, concluding that problems in accurately measuring inflation will require the Federal Reserve to monitor all price trends with vigilance. Together, the inflation developments of the past year were mixed.Inflation (Finance) ; Prices

Nominal GDP targeting rules: can they stabilize the economy?

As the monetary aggregates have become less reliable guides for monetary policy, considerable interest has developed in identifying some other fundamental guide for policy. Many analysts argue that the best guide might be nominal gross domestic product (GDP). Some of these analysts also argue the Federal Reserve should target nominal GDP using one of several possible rules. Such a rule would specify how the Federal Reserve should adjust policy to affect a short-term interest rate in response to deviations of nominal GDP from target.> Clark examines the performance of nominal GDP targeting rules using statistical simulations of the economy. First, he reviews the argument that policymakers should target nominal GDP using a rule. Second, he describes some alternative targeting rules. Finally, he shows how these rules would perform based on simulation analysis of models of the U.S. economy. He concludes that policymakers cannot be certain that a simple nominal GDP targeting rule would improve economic performance.Gross domestic product

Progress toward price stability : a 1997 inflation report

The primary goal of Federal Reserve monetary policy is to foster maximum long-term growth in the U.S. economy by achieving price stability over time. Price stability will be achieved, according to some definitions, when inflation ceases to be a factor in the decision-making processes of businesses and individuals. Although the Federal Reserve has made considerable progress toward price stability since the early 1980s, inflation remains above the level most analysts would associate with price stability. Because stable prices are essential to maximum long-term economic growth and living standards, the Federal Reserve seeks to contain and gradually reduce inflation until price stability is attained.> Clark reviews recent inflation developments in the United States in relation to the Federal Reserve's goal of achieving price stability over time. First, he examines the behavior of inflation over the past year and finds that all major measures of inflation declined, to the surprise of most observers. Second, he shows that forecasters expect a healthy economy and an unwinding of some of the factors slowing inflation last year to produce slightly higher inflation in 1998. Third, he evaluates the behavior of long-term inflation expectations over 1997 and concludes that the public has become more optimistic about long-term inflation prospects. Together, these findings suggest the Federal Reserve made some headway in lowering inflation last year but will need to remain vigilant if it is to achieve price stability over time.Inflation (Finance) ; Prices

A comparison of the CPI and the PCE price index

In the United States, there are two broad indexes of consumer prices: the consumer price index, or CPI, and the chain price index for personal consumption expenditures, or PCEPI. Because the indexes are similar in many respects, the inflation rates measured with them often move in parallel. There are, however, some important differences, which, at times, can lead to large gaps between CPI and PCEPI inflation rates. In 1998, for example, the CPI rose 1.5 percent, while the PCEPI increased just 0.7 percent. The discrepancy was even larger excluding food and energy prices: the core CPI grew 2.4 percent in 1998, while the core PCEPI rose just 1.2 percent.> Such gaps between CPI and PCEPI inflation rates raise a simple question: Is one index better than the other? From a monetary policy perspective, an index could be superior in two respects. First, one of the price indexes might be a more accurate measure of inflation today and in the very recent past. To gauge progress toward price stability over the past year, for example, a policymaker would like to know if either the CPI or PCEPI more accurately measures consumer price inflation today. Second, one of the indexes could be a superior measure of historical inflation rates. A policymaker would probably want to use the better historical indicator for gauging long-term price trends and developing inflation forecasting models.> Because some observers have recently suggested the PCEPI may be a better price index, Clark examines whether the PCEPI is truly superior to the CPI. He reviews the differences in the construction of the indexes and examines the advantages and disadvantages of the CPI and PCEPI. He concludes that, while some observers might weigh the many pros and cons of the indexes differently, with recent improvements the CPI is the better price index.Consumer price indexes ; Personal Consumption Expenditures Price Index

An evaluation of the decline in goods inflation

Over the past decade, the worldwide average for inflation has plummeted from 30 percent to 4 percent. For many countries, especially those starting out with high inflation rates, falling inflation has been desirable. But the experiences of other countries have raised the question of whether inflation can be too low. In some economies, inflation has dipped to levels that risk disruption of the normal functioning of the economy. ; In the United States, many commentaries on the potential for deflation have noted the sharp contrast between goods and services prices. Excluding food and energy, goods prices as measured by the chain price index for personal consumption expenditures (PCE) dropped 2¼ percent in 2003. Yet nonenergy services prices rose nearly 2½ percent last year. Moreover, goods inflation has fallen sharply over the past decade or so, while services inflation has declined only modestly. In 1993, PCE inflation was about ¾ percent for goods and 3¼ percent for services. ; Clark assesses whether the decline in consumer goods inflation relative to services should be cause for concern in the United States. His analysis focuses on three interrelated questions about the decline in goods inflation relative to services: Was it unusual? What caused it? And is it likely to continue? He concludes that the fall in goods inflation relative to services over the past decade is most likely a temporary phenomenon due to dollar appreciation and, to a lesser extent, increased global competition.Inflation (Finance) ; Consumer goods

Is the Great Moderation over? an empirical analysis

The economy of the United States was markedly less volatile in the past two to three decades than in prior periods. The nation enjoyed long economic expansions in each of the last three decades, interrupted by recessions in 1990-91 and 2001 that were mild by historical standards. While it has proven difficult to conclusively pinpoint the causes of the reduced volatility, candidates include structural changes in the economy, better monetary policy, and smaller shocks (good luck). Many economists and policymakers came to view lower volatility--the Great Moderation--as likely to be permanent. ; More recently, the severity of the recession that started in late 2007 has led some observers to conclude the Great Moderation is over. The recession produced declines in economic activity steeper than in the sharp recessions of the 1950s, 1970s, and early 1980s. ; However, the occurrence of a sharp recession does not necessarily mean variability has returned to pre-Great Moderation levels or that the Great Moderation is over. For example, the recession may have produced a more modest rise in volatility that could be temporary. Whether any rise in volatility is more likely temporary than permanent will depend on the cause of the rise in volatility. An increase in volatility due to structural changes in the economy or monetary policy might be permanent. But an increase in volatility driven by larger shocks might prove temporary. ; Clark conducts a detailed statistical analysis of the putative rise in volatility and its sources to assess whether the Great Moderation is over. He concludes that, over time, macroeconomic volatility will likely undergo occasional shifts between high and low levels, with low volatility the norm.

Do producer prices lead consumer prices?

From early 1994 to early 1995, inflation surged in the producer price indexes for crude materials and intermediate goods. For example, inflation in intermediate goods prices rose from 2.6 percent annually in the first half of 1994 to 7.1 percent over the next nine months. At the same time, however, inflation in the consumer price index remained low, at slightly less than 3 percent. Many analysts are concerned that recent increases in the prices of crude and intermediate goods may be passed through to consumers. If such pass-through occurs, the Federal Reserve's progress in moving toward price stability over time would be jeopardized.> Clark examines whether price increases at the early stages of production should be expected to move through the production chain, leading to increases in consumer prices. A review of basic economic theory suggests there should be a pass-through effect--that is, producer prices should lead and thereby help predict consumer prices. A more sophisticated analysis, though, suggests the pass-through effect may be weak. Clark examines the empirical evidence, which indicates that producer prices are not always good predictors of consumer prices. He concludes that the recent increases in some producer prices do not necessarily signal higher inflation.Consumer price indexes ; Production (Economic theory) ; Prices

A Bayesian evaluation of alternative models of trend inflation

With the concept of trend inflation now widely understood as to be important as a measure of the public's perception of the inflation goal of the central bank and important to the accuracy of longer-term inflation forecasts, this paper uses Bayesian methods to assess alternative models of trend inflation. Reflecting models common in reduced-form inflation modeling and forecasting, we specify a range of models of inflation, including: AR with constant trend; AR with trend equal to last period's inflation rate; local level model; AR with random walk trend; AR with trend equal to the long-run expectation from the Survey of Professional Forecasters; and AR with time-varying parameters. We consider versions of the models with constant shock variances and with stochastic volatility. We first use Bayesian metrics to compare the fits of the alternative models. We then use Bayesian methods of model averaging to account for uncertainty surrounding the model of trend inflation, to obtain an alternative estimate of trend inflation in the U.S. and to generate medium-term, model-average forecasts of inflation. Our analysis yields two broad results. First, in model fit and density forecast accuracy, models with stochastic volatility consistently dominate those with constant volatility. Second, for the specification of trend inflation, it is difficult to say that one model of trend inflation is the best. Among alternative models of the trend in core PCE inflation, the local level specification of Stock and Watson (2007) and the survey-based trend specification are about equally good. Among competing models of trend GDP inflation, several trend specifications seem to be about equally good.Bayesian statistical decision theory ; Inflation (Finance) - Mathematical models ; Forecasting