How Much Do Official Price Indexes Tell Us About Inflation?
Speaker(s) Prof. David E Weinstein, Columbia University and NBER
ABSTRACT

Official price indexes, such as the CPI, are imperfect indicators of inflation because they employ ad hoc formulae. These differ from the theoretically well-founded inflation indexes favored by economists. This paper provides the first estimate of how accurately the CPI informs us about “true” inflation, as measured by a superlative inflation index. Our comparison of this true inflation index with the CPI indicates that the CPI bias is not constant but depends on the level of inflation. When measured inflation is low (less than 2.4% per year) the CPI is a poor predictor of true inflation even over 12-month periods.
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