Document Type

Peer-Reviewed Article

Publication Date

12-2017

Journal Title or Book Title

Journal of Business & Economic Policy

Volume

4

Issue

4

Version

Publisher's PDF

Publisher's Statement

Copyrights for articles published in JBEP are retained by the authors, with first publication rights granted to the journal. The journal/publisher is not responsible for subsequent uses of the work. It is the author's responsibility to bring an infringement action if so desired by the author.

Abstract

This paper challenges the underlying assumptions that form the basis for current US inflation measurement. Standard inflation models implicitly treat all divergences of sector price changes as temporary noise. Based on this logic, the only force driving price level changes over time must be the underlying inflation rate. This paper proposes an alternative model that allows for persistent sector-specific price changes, and then conducts statistical tests to determine if sector price changes represent significant alternate forces driving measured inflation. The tests show that several sectoral forces are distorting measured inflation, indicating that traditional inflation gauges are not measuring underlying inflation properly for policy purposes. These distortions suggest that the Federal Reserve's decision to announce an explicit 2% inflation target may have been misguided. The 2 % target may not be appropriate during times when sector-specific forces are dominant drivers of measured inflation.

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