Inflation is harder to measure after a year of pandemic spending

Inflation is harder to measure after a year of pandemic spending

The Edge Markets - World·2021-03-25 05:08

CPI weights suffered sudden obsolescence when the pandemic arrived.

WASHINGTON (March 24): Financial markets are obsessed with where inflation is headed. Statisticians are struggling to figure out where it’s at.

The pandemic has created major headaches for the people whose job it is to determine the rate of inflation right now, and set the benchmarks that will be used to measure it in the future. They face two fundamental problems.

First, gauges like the Consumer Price Index are based on a “basket” of stuff that Americans typically spent their money on in the past – which looks quite different from what people have been buying in the pandemic year.

Second, the standard way of compiling inflation numbers is to visit stores and check their asking prices. Researchers haven’t been able to do that during lockdown, leaving holes in the data. And a lot of shopping has in any case shifted online, where prices can be tailored to individual shoppers and subject to rapid change – making them harder to measure.

These are more than just technical issues. The incomes of almost 80 million Americans, from recipients of social security and food stamps to workers in collective wage agreements, are tied in some way to the CPI. When it fails to capture changes in the cost of living, their budgets can get squeezed. (The Federal Reserve uses a different measure of inflation, based on more up-to-date spending patterns, so its interest-rate decisions are less affected by the measurement problem.)

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