Charles Steindel

A Review of Core Inflation and an Evaluation of its Measures

This paper provides a review of the concept of core inflation and evaluates the performance of several proposed measures. We first consider the rationale of a central bank in setting its inflation goal in terms of a selected rate of consumer price growth and the use of a core inflation measure as a means of achieving this long-term policy objective. We then discuss desired attributes of a core measure of inflation, such as ease of design, accuracy in tracking trend inflation, and predictive content for future movements in aggregate inflation. Using these attributes as criteria, we evaluate several candidate series that have been proposed as core measures of consumer price index (CPI) inflation and personal consumption expenditure (PCE) inflation for the United States. The candidate series are inflation excluding food and energy, inflation excluding energy, and median inflation, as well as exponentially smoothed versions of aggregate inflation and the aforementioned individual series. ; For PCE inflation, we examine quarterly data starting in 1959. Unlike previous research, we confine our analysis to the methodologically consistent CPI index, which is only available starting in 1978. We find that most of the candidate series, including the familiar ex-food and energy measure, demonstrate the ability to match the mean rate of aggregate inflation and track movements in its underlying trend. In the within-sample analysis, we find that core measures derived through exponential smoothing, in combination with simple measures of economic slack, have substantial explanatory content for changes in aggregate inflation several years in advance. In the out-of-sample analysis, however, we find that no measure performs consistently well in forecasting inflation. Moreover, we document evidence of some parameter instability in the estimated forecasting models. Taken together, our findings lead us to conclude that there is no individual measure of core inflation that can be considered superior to other measures.

Productivity: What is it, and Why Do We Care About it?

Economists, business analysts, and policymakers have all focused considerable attention on U.S. productivity growth in recent years. This paper presents a broad overview of productivity--both labor and total factor--and discusses why it is such an important topic. We begin with the official U.S. productivity statistics prepared by the U.S. Bureau of Labor Statistics and discuss several stylized facts. We show how productivity relates to critically important variables like long-run growth, living standards, and inflation. We then describe the proximate factors that determine labor productivity using a standard growth accounting framework. Finally, we outline a series of unresolved productivity issues that have direct implications for the future of the U.S. economy.

Chain-Weighting: The New Approach to Measuring GDP

Recent dramatic changes in the U.S. economys structure have compelled BEA to revise the way in which it measures real GDP levels and growth. By switching to a chain-weighted method of computing aggregate growth--which relies heavily on current price information--BEA will be able to measure GDP growth more accurately by eliminating upward biases in the incoming data.

The Effect of Tax Changes on Consumer Spending

Many supporters of the tax cut enacted this summer viewed it as an important stimulus to consumer spending. But an analysis of the effects of earlier income tax cuts suggests that the consumer response to such initiatives is, in fact, quite variable. Two conclusions stand out: First, consumers will be more likely to boost spending if the change in tax liabilities is permanent. Second, consumers will wait to increase spending until a tax change affects their take-home pay.

Are There Good Alternatives to the CPI

Critics of the consumer price index--the most widely watched inflation measure--contend that it overstates inflation by as much as 1 percentage point a year. Some have argued that alternative indexes eliminate the CPIs upward bias and offer a more accurate reading of inflation levels. A closer look at these alternatives, however, reveals that they have substantive problems of their own, suggesting that the CPI, though flawed, is still our most reliable indicator of changes in inflation.

Housing Activity and Consumer Spending

The current expansion has seen record-high levels of transactions in housing, extraordinary growth in the aggregate value of owner-occupied housing, and large increases in the amount of funds realized from the refinancing of mortgage debt. Many analysts thus have pointed to the strong housing market and rising home prices as a major pillar supporting recent economic growth and have expressed concern that a contraction in housing activity and values could pose a significant risk to consumer spending and real economic growth. This paper explores the channels by which the housing market may affect consumer spending and assesses the potential risk from a softening in the housing market. Our assessment is that while a housing slowdown by itself may slow consumer spending some, it is probably insufficient to precipitate a downturn without some additional shocks outside of the sector.

Housing Costs in the CPI: What Are We Measuring?

The treatment of owner-occupied housing in the Consumer Price Index has long been a subject of confusion and consternation. Thus, a session to explore the issues was organized at the National Association for Business Economics Annual Meeting in Chicago on September 26, 2005.