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posted on 28 August 2017

Getting A Jump On Inflation

from the Dallas Fed

-- this post authored by Alan Armen and Evan F. Koenig

Obtaining timely and accurate inflation readings is of great importance to Federal Reserve policymakers, who are charged with maintaining long-run price stability and who often cite inflation developments in explanations of their actions. Unfortunately, timeliness and accuracy often conflict.

In this article, we discuss how to combine the information in our most timely inflation indicators to anticipate movements in policymakers’ preferred inflation gauge, the personal consumption expenditures (PCE) chain price index. The analysis shows that one need not wait for official PCE inflation estimates from the U.S. Bureau of Economic Analysis (BEA) to get an accurate read on inflation. Moreover, the earliest official PCE inflation estimates should not be taken at face value. Recent low inflation readings will likely be revised upward.

Timeliness vs. Accuracy

The Fed’s longer-run price-stability goal is annual inflation of 2 percent as measured by the headline PCE chain price index. The PCE price index has several advantages over the morefamiliar Consumer Price Index (CPI): It is more responsive to shifting spending patterns, covers a broader range of expenditures and is revised as improved data and measurement methodologies become available.

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