Since some measure of "price-level stability" constitutes one half of the Fed's dual mandate, I thought it might be of some interest to document the behavior of various measures of the price-level and its components in the U.S. Some of what I report here will be familiar to some readers and maybe surprising to others. I conclude with a thought about NGDP targets and what they're supposed to accomplish over a price-level target.
Let me start with the consumer price index (CPI). The CPI is constructed by the Bureau of Labor Statistics. The CPI attempts to measure the dollar cost of a typical basket of consumer goods and services (to see which goods and service are included, click here).
The following figure plots the CPI, core CPI, food, and energy. The core CPI is defined as "all items excluding food and energy."
The two striking properties of this data are: (1) consumer goods and services prices (measured in dollars) have generally been rising, with an exceptionally rapid rise occurring in the 1970s; and (2) the dollar price of energy is relatively volatile, with its trend diverging from the other CPI components for a considerable length of time.
When people speak of "high inflation" these days, I think they are generally focused on the recent behavior of food and energy prices. As the diagram above shows, energy prices have increased by about 150% since 2000. Food prices have generally risen more rapidly than other CPI components since 2009, but only modestly so. But it's important to keep in mind that while food and energy are obviously important, together they account for only 25% of expenditures on consumer goods and services (in the CPI basket).
While many people appear to be focused on the rapid rise in energy prices, the data above suggest that it might be more interesting to ask why energy prices remained so low throughout much of the 1980s and 1990s. Economists like to stress the role of relative prices in coordinating the allocation of resources in an economy. The price of energy relative to other consumer goods and services fell significantly over the time period 1984-1999, and caught up with the rest of the basket only in 2004.
Why was energy so cheap from 1984-2004 and what implications (if any) did this have for resource allocation?
The next diagram plots the same data, but using a log scale. Transforming the data in this manner is convenient because the slopes of the curves can be interpreted as inflation rates.
This diagram highlights the effect of the energy price shocks that occurred in the early and late 1970s. The sharp spike in energy prices that occurred in 2008 is relatively small by comparison.
Let's take a look at the (log) CPI from 1990 onward and draw a linear trend line through the data. Here is what we get:
The CPI inflation rate since 1990 averaged 2.62% per annum. The current CPI inflation rate appears to be close to trend.
Of course, the Fed's official target of 2% inflation refers not to CPI inflation, but to the PCE inflation rate. PCE stands for "Personal Consumption Expenditures" price index; see here. The following diagram plots the PCE price index from 1959 onward, and decomposes the PCE into (1) durable goods, (2) nondurable goods, and (3) services.
It's interesting to see the price deflation in consumer durables since the early 1990s. The volatility in nondurable goods near the end of the sample is likely attributable to energy prices.
Now let's take a look at the (log) PCE from 1990 onward, together with linear trend:
The PCE inflation rate since 1990 averaged 2.09% per annum.
What's interesting about this diagram is that even though the Fed does not officially target the PCE price level, the data above suggests that the Fed is behaving as if it does.
As a price-level (PL) target is equivalent to a nominal GDP (NGDP) target in a wide class of macroeconomic models (especially under the assumption of constant productivity growth), then what more does the NGDP crowd expect from an official NGDP target? Seems to me that they are just asking for more price inflation and wishfully hoping that some of the subsequent rise in NGDP will take the form of real income.
Tell me I'm wrong (and why).
Let me start with the consumer price index (CPI). The CPI is constructed by the Bureau of Labor Statistics. The CPI attempts to measure the dollar cost of a typical basket of consumer goods and services (to see which goods and service are included, click here).
The following figure plots the CPI, core CPI, food, and energy. The core CPI is defined as "all items excluding food and energy."
The two striking properties of this data are: (1) consumer goods and services prices (measured in dollars) have generally been rising, with an exceptionally rapid rise occurring in the 1970s; and (2) the dollar price of energy is relatively volatile, with its trend diverging from the other CPI components for a considerable length of time.
When people speak of "high inflation" these days, I think they are generally focused on the recent behavior of food and energy prices. As the diagram above shows, energy prices have increased by about 150% since 2000. Food prices have generally risen more rapidly than other CPI components since 2009, but only modestly so. But it's important to keep in mind that while food and energy are obviously important, together they account for only 25% of expenditures on consumer goods and services (in the CPI basket).
While many people appear to be focused on the rapid rise in energy prices, the data above suggest that it might be more interesting to ask why energy prices remained so low throughout much of the 1980s and 1990s. Economists like to stress the role of relative prices in coordinating the allocation of resources in an economy. The price of energy relative to other consumer goods and services fell significantly over the time period 1984-1999, and caught up with the rest of the basket only in 2004.
Why was energy so cheap from 1984-2004 and what implications (if any) did this have for resource allocation?
The next diagram plots the same data, but using a log scale. Transforming the data in this manner is convenient because the slopes of the curves can be interpreted as inflation rates.
This diagram highlights the effect of the energy price shocks that occurred in the early and late 1970s. The sharp spike in energy prices that occurred in 2008 is relatively small by comparison.
The CPI inflation rate since 1990 averaged 2.62% per annum. The current CPI inflation rate appears to be close to trend.
Of course, the Fed's official target of 2% inflation refers not to CPI inflation, but to the PCE inflation rate. PCE stands for "Personal Consumption Expenditures" price index; see here. The following diagram plots the PCE price index from 1959 onward, and decomposes the PCE into (1) durable goods, (2) nondurable goods, and (3) services.
It's interesting to see the price deflation in consumer durables since the early 1990s. The volatility in nondurable goods near the end of the sample is likely attributable to energy prices.
Now let's take a look at the (log) PCE from 1990 onward, together with linear trend:
The PCE inflation rate since 1990 averaged 2.09% per annum.
What's interesting about this diagram is that even though the Fed does not officially target the PCE price level, the data above suggests that the Fed is behaving as if it does.
As a price-level (PL) target is equivalent to a nominal GDP (NGDP) target in a wide class of macroeconomic models (especially under the assumption of constant productivity growth), then what more does the NGDP crowd expect from an official NGDP target? Seems to me that they are just asking for more price inflation and wishfully hoping that some of the subsequent rise in NGDP will take the form of real income.
Tell me I'm wrong (and why).
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