As inflation creeps higher, talk is heating up about changing the way it’s measured. That’s good news for some – but for others, it raises new concerns about inflation risk.
The Bureau of Labor Statistics has been talking about the need to focus on wages, rather than simply comparing the value of dollars spent on a product. Think of this like the way retailers adjust prices to account for fluctuating prices on some items (a la a change in your local grocer’s item cost) versus more traditional methods of comparing units of measurement.
That’s good, according to some economists. It allows them to look at the consumer in a completely different way – which means they can forecast what prices will do in the future.
Still, many folks are concerned about the inflation risk as of late. So much so that the Federal Reserve’s own staff study – released to the press this week – recommends changes to the measurement that would ease the inflation risks that recently have been “uncomfortably high” for policymakers.
When prices rise by much more than inflation appears to be increasing, it makes it harder for the Fed to stick to its inflation target. So it’s not surprising that many people have been raising their hackles recently about the rapid rise in inflation. When the Federal Reserve wasn’t worried about inflation a few years ago, it kept interest rates low to encourage businesses to expand and hire new workers. Now that the economy is growing, the Fed is raising rates – essentially trying to restrict credit. The expected impact on prices might be that businesses won’t be hiring any more, and consumer prices will go down.
For those still concerned, it sounds like the Federal Reserve is keen to stop the inflation risk at its source: it wants to restrict credit. But it can’t if the underlying rates of inflation aren’t going to go down or vice versa.
Fed officials largely agree with the change in measurement. In fact, in its new study, the Federal Reserve says that if the BLS changed the way it calculates inflation, the “risk to price stability from remaining ‘excessively high’ exceeds the risk to price stability from doing nothing.”
The BLS’s standard measure of inflation now shows prices rising by 2.6 percent year-over-year. The new version would show prices rising at 2.5 percent.
The study also found an obvious risk if the metrics were changed. “Although a change in the BLS’s inflation measure would ultimately have a positive effect on the longer-run financial stability of the United States, it is not very effective in curbing the risk of an unexpected increase in inflation.”
The BLS is no stranger to frequent changes in its methodology – from setting the desired inflation rate to managing several dozen different sets of prices. Most recently, the BLS came up with a method to measure inflation that’s based on core consumer prices – essentially, items that increase at just a somewhat slower rate than total inflation. But that method does a much better job of taking account of inflation-adjusted wages. It also is based on pay increases – and all of this is in response to growing concerns about stagnant wages.
Some on the left have long wanted to shift from the traditional measure of inflation to a more focused measure of core inflation. But I’ve also heard from some business groups that want the Federal Reserve to stay focused on the traditional measure, fearing that if the BLS were to switch the measure, it would have negative impacts on consumer and business confidence.
Still, neither option seems likely to be popular on its own. Those on the left would like to see the broader measure of inflation (it’s been around for decades) replace the narrower measure, but that isn’t likely to happen. And some on the right worry that just changing the measure won’t stop inflation entirely.