Here’s The Proof: How The CPI Is Underrepresenting Food Inflation By 40%
The “muzzle” on reported inflation has policymakers and analysts perplexed.
As Joseph Carson, former director of economic research at Alliance Bernstein writes in his follow up to a “New Working Theory on Inflation“, numerous economic explanations and theories have been offered, and policymakers are considering making changes to their operating price-targeting framework. Yet, before any decisions are made policymakers should consider all of the factors that could be keeping a “muzzle” on published inflation.
Here are two:
First, a little more than 20 years ago the Bureau of Labor Statistics (BLS) introduced a number of new measurement techniques in the estimation of consumer inflation (see Boskin Commission). So the current business cycle, which started in 2009, is the second consecutive cycle in which these new procedures have been employed.
Statistical changes have been made to account for product substitution, a greater degree of quality changes in products and services and faster introduction of new outlets or ways in which people shop. The introduction of new variables in the estimation of inflation alters the pattern and at various times the rate of change as well.
Prior to their implementation, analysts and government statisticians estimated that the potential reduction in core inflation from all of these statistical changes would range from one-half to a full percentage point. Yet, all of those estimates were looking backwards and there is no guidance from the statistical agencies of the scale of the reduction in reported inflation after implementation.
Odds are high that the impact on reported inflation varies year to year, with some years at the upper end of range of estimate and others at the lower end.
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