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Wednesday, December 11, 2013

'Why Do Measures of Inflation Disagree?'

This is useful and worth having in the archives for later reference:

Why Do Measures of Inflation Disagree?, by Yifan Cao and Adam Hale Shapiro, FRBSF Economic Letter: In January 2012, the Federal Reserve’s policymaking body, the Federal Open Market Committee (FOMC), announced it judged “that inflation at the rate of 2%, as measured by the annual change in the price index for personal consumption expenditures (PCEPI), is most consistent over the longer run with the Federal Reserve’s statutory mandate” (Board of Governors 2012). The consumer price index (CPI) is an alternative inflation measure with a longer history. Like the PCEPI, the CPI is closely monitored by the FOMC and numerous private-sector firms and government agencies to track price movements. These two inflation measures tend to move closely together, though the CPI has tended to increase a bit faster in the past. Currently, annual CPI inflation excluding volatile food and energy prices is 0.5 percentage point higher than the comparable PCEPI core inflation measure. 
This Economic Letter examines the principal differences between the PCEPI and the CPI, and why their rates of inflation do not always align with one another. Their recent divergence can be explained largely by differences in how each measure accounts for consumer shelter costs. However, historical data imply that the two inflation measures should close much of this gap. Furthermore, when CPI inflation exceeds PCEPI inflation, it tends to slow towards the latter to close the gap. ...[continue]...

    Posted by on Wednesday, December 11, 2013 at 01:42 PM Permalink  Comments (0)


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