Inflation is on the rise! Or is it? We often hear of the difference between core inflation and headline inflation, but we also have a number of different measures of inflation. The consumer price index inflation (CPI), the producer price index (PPI), and the personal consumption expenditure index (PCE) are all used to measure inflation. Which one does the Fed focus on and why? Are the other inflation measures useful or just noise? For example, the PCE index showed 1.6% inflation for the year ending August 2011.
Minneapolis Fed President Narayana Kocherlakota recently questioned whether or not the FOMC’s inflation target was on the rise. Worries about unhinging inflation expectations are not new. As far back as February 2009 (and probably further) some economists were predicting that inflation expectations were on the rise (it is also interesting to note the unemployment and growth projections out of the FOMC back in October 2008… Lehman month). Others (such as Goldman Sachs economists) are questioning whether the Fed should even consider targeting inflation, but rather look at nominal GDP targeting instead.
Questions to consider:
- What should the Fed target? CPI? PCE? PPI? Core? Headline? Hemline? What are the advantages of each? (The hemline is a joke… but there is such a thing called the hemline indicator)
- What would the Fed do today if they were targeting nominal GDP instead. What would this imply? Do you think the Fed could achieve that goal? What might stand in the Fed’s way?