by This is a reason I put "inflation"" in quotes — lack of theoretical (causal) explanation and problems with measurability since "inflation" is not directly observable, while "inflation" gets treated as if it were a "thing." It's not only complicated but also complex, since prices are affected by expectations under uncertainty.ConclusionMore research is clearly needed to understand the best measures of inflation to inform macro models, especially as the U.S. economy continues to respond to structural changes. There is a need for both an accurate understanding of capacity constraints in the economy, and a consistent measure of changes in inflationary expectations—and these may not be well captured by any one measure, let alone the measures traditionally used. For U.S. policymakers, the
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Conclusion
More research is clearly needed to understand the best measures of inflation to inform macro models, especially as the U.S. economy continues to respond to structural changes. There is a need for both an accurate understanding of capacity constraints in the economy, and a consistent measure of changes in inflationary expectations—and these may not be well captured by any one measure, let alone the measures traditionally used. For U.S. policymakers, the challenge is twofold. They need to calm inflationary expectations on the one hand, even if expectations are not based on a full understanding of what may persistently drive future inflation, while also preserving the health of the economy itself on the other. Balancing these needs will also require reexamining old assumptions.Measuring inflation is hard. Official statistics are very good at measuring inflation, but how to use those measures is more tricky because it is conceptually difficult and context dependent. The COVID pandemic makes the application of go-to inflation measures even more challenging as it created unprecedented shifts in spending across sectors, leading to shifts appearing as increases or decreases in major components of primary inflation measures.
Michael Madowitz