Financial markets are obsessed with where inflation is heading. Statisticians struggle to understand where it is.
The epidemic has caused a lot of headaches for people whose job it is to determine the rate of inflation right now, to set the criteria that will be used to measure it in the future. They face two fundamental problems.
First, measures such as the Consumer Price Index are based on a “basket” of items that Americans used to spend their money on in the past, which is quite different from people who bought it during the epidemic year.
Second, the standard way to compile inflation figures is to visit stores and check their bids. Researchers were unable to do this during the block, leaving data holes. And in many cases, many purchases have moved to online, where prices can be adjusted to individual buyers և undergo rapid changes, making them more difficult to measure.
These are more than just technical issues. The incomes of nearly 80 million Americans, from recipients of social security stamps to collective bargaining workers, are somehow linked to CPI. When it fails to capture the cost of living, their budgets can shrink. (The Federal Reserve uses a different measure of inflation based on more modern forms of spending, so decisions about its interest rates have less of an impact on the measurement problem.)
The rapid economic recovery from the epidemic has raised fears of rising inflation. Data released on Wednesday showed that the amount of prices paid by American businesses reached a record high in March.
The immediate challenge for inflation technicians is the issue of the basket.
“In fact, at the onset of the epidemic, the CPI weights suddenly became obsolete,” said Marshall Reinsdorf, an economist at the International Monetary Fund’s statistics department, in a November presentation.
For example, on the eve of a meal, 6.3% of the US CPI basket, but Reinsdorf estimates that the amount of spending habits during the epidemic would reduce that weight by almost half. Americans, meanwhile, spent more on grocery stores, where prices rose last year.
Alberto Cavallo, an economist who teaches at Harvard Business School, developed a US inflation measure for the 19th century using a basket based on credit card transactions that reflect what Americans are buying. It is consistently higher than the official CPI, և last month for the first time exceeded the onset of the epidemic.
In the normal course of business, the Bureau of Labor Statistics, which makes up the main inflation figures in the United States, would update its CPI basket early next year, reflecting the 2020 forecast. Consumption patterns. But it can create new problems, fixing spending habits as a benchmark for future inflation.
The bureau is considering adjusting its usual procedures, said Jonathan Church, an economist at BLS. Alternatives include pretending that 2020 has never been the case, staying true to previous years, or adjusting Covid-era figures based on secondary sources. Either way, there is a risk of further incorrect measurements.
World peers face similar problems. The Organization for Economic Co-operation and Development should publish some advice for member countries. The second number refers to data collection. BLS employs about 400 researchers who collect pricing information through two key surveys. One focuses on companies selling goods and services, and the other asks landlords and tenants to pay rent.
More than 70% of the data from the first study before the epidemic, and about 40% from the second, were compiled during in-person visits, a mix that has been refined over the years. But last month, 84% of price data was collected online, the rest from phone inquiries, while rent inquiries were done entirely over the phone.
“These factors have led to an increase in the number of temporarily unaffordable, forced prices,” the Bureau said in a recent CPI report. “Many indexes are based on lower-than-usual prices.”
The prices of peanut butter, lemon and broccoli remained empty in the February issues. Data on new car prices in Detroit, known as Motor City, were considered “equivalent to publication”.
Although price inspectors should be able to return to stores soon, consumers may prefer not to. The transition to e-commerce accelerated during the epidemic. It accounted for 19% of US retail sales in the fourth quarter of 2020, which is almost 4 percentage points higher than last year.
Online’s competition between traditional retailers is calculated to put pressure on inflation. But Harvard Cavallo says its online price index has been growing rapidly since November, a change that has not been reflected in the CPI.
And wider measurement problems can arise, as online sellers can easily adjust prices for individual buyers կարգ adjust them a thousand times a day through algorithms. “It’s a challenge for a statistical agency,” said Werbrügen of the Cleveland Fed. “How do they get the real prices they charge consumers?”