August 15, 2018

IT'S IMPOSSIBLE TO OVERSTATE DEFLATION:

Measuring inflation: What's changed over the past 20 years? What hasn't? (Finn Schuele & David Wessel, 8/14/18, Brookings)

Despite improvements made over the past two decades, the Consumer Price Index (CPI) still overstates the annual rate of inflation by about 0.85 percentage points, according to Brent Moulton, a 32-year veteran of the agencies that compile the nation's economic statistics who retired in 2016 as Associate Director of the Bureau of Economic Analysis (BEA). This represents some improvement since 1996, when the congressionally appointed Boskin Commission estimated that the CPI overstated the annual rate of inflation by 1.1 percentage points. [...]

Moulton finds that the BLS managed to substantially reduce bias from lower-level substitution and new products/quality change. However, he finds that the BLS failed to address upper-level substitution bias, the bias from consumers substituting across categories as prices change. Notably, Moulton estimates that CPI bias today is only slightly lower than in 2003, suggesting that most improvements occurred in the late 1990s and early 2000s. [...]

Moulton points out that changes in the economy have offset some of the improvement in measurement. Digital goods, the service sector, and multinational enterprises are all more important now than 20 years ago, and all are difficult to measure accurately.

He suggests tackling the remaining biases by: (1) improving the measurement of quality-adjusted prices for information and communications technology equipment and associated digital services; (2) expanding the quality adjustment process to a wider range of new goods, not just those that directly replace a disappearing good; (3) making a systematic effort to deal with the effects of globalization on the measurement of GDP.

Posted by at August 15, 2018 4:25 AM

  

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