Monitoring Inflation: a new tool for official statistics
Keywords: inflation, HICP, asset inflation, general price index.
1.
INTRODUCTION
The recent economic and financial crises have led to low economic growth, interest rates
and inflation. Priority is given to debt restructuring and pay-off, and the expansion of credit
to enterprises is limited. Investment in assets, bonds as well as shares, seems the only possible way to obtain a higher yield on financial capital. Just as before the crises, this may
lead to bubbles in asset and real estate markets. To identify the risks associated with such
bubbles, we need information about price movements in these markets. This information
is mostly available, but some part comes from NSIs, another part from central banks, a
third part from private parties, and for some part there is no information yet. So there is a
case for expanding the data collection and to present all this information in a more unified
way. But in order to look at inflation in a more broad way, we also need to present this
information such that it will become more easy to identify developments in prices, and to
link it with information on prices of goods and services, and world market prices.
Therefore we will first look at three topics:
1. Is it possible to develop a general measure of inflation that encompasses all prices,
both goods, services and assets?
2. What information do users, in particular policy makers, need to be able to identify
and assess developments in prices?
3. How can we present information about inflation and prices in a systematic way that
serves users?
2.
METHODS
2.1. The concept of a general price index
The concept of a general price index has a long history, which goes back to the early decades of the 20th century. In particular in the USA, several attempts, e.g. Snyder (19261934) have been made to define and measure a general price index with prices of transactions in goods as well as assets combined into a single index. However, there was never
any consensus about which goods and in particular which assets were to be included, nor
about the weights of the goods and the assets subaggregates. Therefore, NSIs have never
attempted to actually produce a general price index.
Using intertemporal economic theory, the concept of the general price index has been
clearly developed by Alchian and Klein (1973) and Weitzman (1976). Both papers view
consumption over the life cycle as the ultimate end of economic activities. They use a
model where consumption takes place in several periods, and investment and assets are
means to distribute consumption over the life cycle of the consumer, i.e. to transfer consumption from one period to another. Weitzman shows that national income is the present
value of current and future consumption over the life cycle; and so real national income is
the quantity index of consumption over the life cycle, and the implicit deflator of national
income is the general price index.
Since in a closed economy, national income equals the sum of current consumption and
current capital formation, we see that current capital formation is equal to the present value
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of future consumption. An important consequence is that we must not only look at the price
of consumption but also to that of capital formation.
However these models depend on expected prices of future products and assets, and so are
inherently difficult to apply. A direct measurement of consumption and its prices over the
life cycle and the corresponding transactions in assets is nearly impossible, and a general
will be volatile because of fluctuations in expectations. So another approach is in order.
2.2. Information needs of policy makers
Policy makers appear to have a need for more information on asset prices (Filardo, 2000;
Goodhart, 2001, 2005). In particular they want to use this information to judge the consequences of the regular inflation, measured via the HICP, so to give a broader view and
analysis of inflation. The main argument here is that changes in asset prices may have
predictive power for future inflation. However, they explicitly deny the usefulness of a
general price index. For example, Goodhart (2001, p. F352) states: “… there are strong
arguments for keeping the status quo”.
2.3. Towards an inflation barometer
The conclusion of this section is that, although the concept of a general price index is
theoretically sound, implementation problems as well as user needs demand another approach which is more practical. Therefore we propose to develop an inflation barometer,
which shows several aspects of inflation in an overview. To select these aspects we have
looked at the publications of forecast agencies and of central banks and how these try to
assess developments in prices. Based on our reading of these, such a barometer would
encompass prices of
1.
2.
3.
4.
5.
3.
consumer goods and services
output, labor, and fixed capital formation
intermediate inputs and energy
real estate, including housing
assets
RESULTS
Figure 1 shows an example of the inflation barometer for a single quarter. All series show
the percentage change relative to the same quarter of the previous year. The barometer
immediately shows which price developments are outliers, which are positive and which
are negative. We see that the CPI has not increased much, i.e. inflation on the markets for
goods and services is low. But we also see that prices have risen much on some other
markets, such as for crude oil and shares.
We can also show the barometer in a dynamic way, by showing the images for a series of
quarters, either as a collection of graphs next to each other, or by actually “playing” the
images as in a movie. In this way the development over time is visualized.
Of course, such a barometer cannot show all relevant information. Therefore the underlying information is also made available, which in the barometer is implemented by means
of clickable links for each of the markets shown. Figure 2 illustrates what is shown when
one clicks on the housing market. We then see a time-series graph of the underlying series
for the housing market, such as the interest rate for mortgages, the number of houses sold,
and the price of houses sold.
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Figure 1. Inflation barometer for 2010-Q1
Figure 2. Details for housing market 1999 - 2016
4.
CONCLUSIONS
…..
REFERENCES
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21 (Bank for International Settlements)
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Alchian, A. and B. Klein, 1973, On a correct measure of inflation. Journal of Money,
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Borio, C.E.V., N. Kennedy and S.D. Prowse, 1994, Exploring aggregate asset price fluctuations across countries; Measurement, determinants and monetary policy implications.
BIS Economic Papers 40 (Bank for International Settlements).
Detken, C. and F. Smets, 2004, Asset price booms and monetary policy. Working paper
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Bank of Kansas City) 85 (3), pp. 11-38. url: https://www.kansascityfed.org/~/media/files/publicat/econrev/econrevarchive/2000/3q00fila.pdf
Goodhart, C.A.E, 2001, What weight should be given to asset prices in the measurement
of inflation? Economic Journal 111, pp. F335-F356.
Goodhart, C.A.E., 2005, Beyond current policy frameworks. BIS Working Papers 189,
Bank for International Settlements, Bazel. url: http://www.bis.org/publ/work189.pdf
Snyder, C., 1926, Deflated dollar-value series as measures of business. Review of Economics and Statistics 8(2), pp. 85-92. doi: 10.2307/1926937.
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