When is inflation low?

No 94-09, Working Papers in Applied Economic Theory from Federal Reserve Bank of San Francisco

Abstract: Recent research has clarified the nature of measurement errors in U.S. price indexes. Changes in the quality of goods create severe problems. Laspeyres-type indexes suffer from substitution bias from one good to another and from one type of outlet to another. Available evidence suggests that the CPI has an upward bias in the neighborhood of 2 percentage points per year. ; Another issue concerns assessment of underlying inflation when prices are subject to temporary disturbances. Focusing on price indexes excluding food and energy seems questionable. High-frequency noise is best filtered out by averaging over time; removing energy prices altogether is inappropriate because oil price shocks are often persistent. The appropriate policy response to a price shock is a different issue from price measurement. Finally, it is helpful to keep in mind that during the expansion phase of the cycle the odds are that inflation will rise rather than fall.

Keywords: Inflation (Finance); Consumer price indexes; Monetary policy - United States (search for similar items in EconPapers)
Date: 1994
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Published in Conference on Monetary Policy in a Low Inflation Regime

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