Economist20000510 - Fighting Americas inflation flab Oct...

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Fighting America’s inflation flab Oct 5th 2000 From The Economist print edition One way to reduce inflation is to raise interest rates. Another is to pick a better-looking measure of it DIETERS, desperate to convince themselves that they have lost weight, sometimes “adjust” the dial on their scales, magically shedding a few pounds. Prudent central bankers, charged with keeping inflation rather than waistlines under control, would surely never cheat like that. Yet some critics claim that America’s Federal Reserve has been tampering with its inflation gauge. The accuracy of inflation measures matters, because they largely determine when central banks raise or cut interest rates. At its meeting on October 3rd, the Fed left rates unchanged, as had been widely expected. The Fed believes that inflation remains under control, and that somewhat slower economic growth will continue to keep prices in check. In contrast, at its meeting two days later, the European Central Bank (ECB) increased its interest rate by a quarter point to 4.75%. This is because inflation in the euro area is likely to top 2.5% in September, well over the 2% ceiling of the ECB’s medium-term target. Curiously, despite the popular view that America’s inflation remains subdued, its consumer prices are actually rising faster than in the euro area—up by 3.4% in the year to August. Indeed, the core rate of inflation, excluding food and energy, was 2.6% in August, up from 1.9% at the end of 1999. Over the same period, core inflation in the euro area edged up more modestly, from 1.1% to 1.3%. So how can Alan Greenspan, the Fed chairman, sleep soundly at night? One reason is that he sees the consumer-price index (CPI) as badly flawed. He prefers the personal consumption expenditure (PCE) deflator, which just happens to be rising more slowly. Could this be a nasty case of “inflation trim”: changing to a friendlier measure of
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Economist20000510 - Fighting Americas inflation flab Oct...

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