Global| Aug 26 2020Earth To Fed: Inflation Mandate Has Been Met
|in:Viewpoints
Summary
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 [...]
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.
Critics would argue it's not the Fed's job to measure inflation. That is true. But that didn't stop Federal Reserve Chairman Alan Greenspan in the mid-1990s to argue before Congress that the CPI was overstating actual inflation. That testimony compelled Congress to create the Boskin Commission, which produced a series of recommendations designed to eliminate the presumed "overstatement" of the CPI.
Mr. Greenspan questioned the accuracy of reported inflation long before targeting inflation was a Fed policy tool. One would think the new generation of policymakers would be even more curious over accurate price measurement since it's their target for policy success or failure.
The fact that core CPI, even with its downward bias on housing inflation, has been running above the 2% target for 4 of the past 5 years before the pandemic should be sufficient evidence that there is nothing wrong with the policy approach.
The irony in this is that policymakers have spent a year or more on a comprehensive review of its policy approach so that they could have more success in achieving their inflation target. And all along the Fed has hit and exceeded the inflation target and policymakers don't even know it.
Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.