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22 Dec 2015
Global inflation measures: A comparative perspective - BBH
FXStreet (Delhi) – Sam Waters, FX Analyst at BBH, suggests that inflation or indeed its opposite has driven monetary policy among the largest high income economies.
Key Quotes
“With nominal rates thought to be bounded by zero, the US, UK, and Japan engaged in operations to increase the size of the central bank’s balance sheets as an unorthodox channel of easing monetary conditions. European central banks demonstrated interest rates can fall below zero.”
“Countries have adopted different measures of consumer inflation, but we find few discussions seem to be informed of this fact, which makes international comparisons of inflation more difficult. Price stability is a mandate shared by nearly all central banks.The Federal Reserve and the Bank of Japan have adopted core inflation targets while the European Central Bank (ECB) and the Bank of England focus on the headline rate.”
“The logic of focusing on the core rate is that it is where price signals emanate. Food and energy tend to be volatile, and, therefore, obscure the signal with noise. Over the last half century in the US, headline inflation converges with core inflation, and not the other way around. In fact, a recent San Francisco Federal Reserve paper found that this year’s core inflation is a better predictor of next year’s headline inflation than the break-evens (the yield of a conventional Treasury bond minus yield of an inflation-linked security with the same maturity). Also, food and energy are often driven by supply considerations, which is something that monetary officials tend to have somewhat less influence over than demand.”
“The Eurozone, Japan, UK, and the US have different economic frictions, different headline basket weights, and different scopes for core CPI. They all find themselves in comparable inflationary environments: near zero headline inflation and slightly firmer core inflation. As inflation continues to evolve in these countries, economists can continue to evaluate if the two CPI measures are cherry-picked, inaccurate monitors of economic health or truly reflective of consumer prices.”
Key Quotes
“With nominal rates thought to be bounded by zero, the US, UK, and Japan engaged in operations to increase the size of the central bank’s balance sheets as an unorthodox channel of easing monetary conditions. European central banks demonstrated interest rates can fall below zero.”
“Countries have adopted different measures of consumer inflation, but we find few discussions seem to be informed of this fact, which makes international comparisons of inflation more difficult. Price stability is a mandate shared by nearly all central banks.The Federal Reserve and the Bank of Japan have adopted core inflation targets while the European Central Bank (ECB) and the Bank of England focus on the headline rate.”
“The logic of focusing on the core rate is that it is where price signals emanate. Food and energy tend to be volatile, and, therefore, obscure the signal with noise. Over the last half century in the US, headline inflation converges with core inflation, and not the other way around. In fact, a recent San Francisco Federal Reserve paper found that this year’s core inflation is a better predictor of next year’s headline inflation than the break-evens (the yield of a conventional Treasury bond minus yield of an inflation-linked security with the same maturity). Also, food and energy are often driven by supply considerations, which is something that monetary officials tend to have somewhat less influence over than demand.”
“The Eurozone, Japan, UK, and the US have different economic frictions, different headline basket weights, and different scopes for core CPI. They all find themselves in comparable inflationary environments: near zero headline inflation and slightly firmer core inflation. As inflation continues to evolve in these countries, economists can continue to evaluate if the two CPI measures are cherry-picked, inaccurate monitors of economic health or truly reflective of consumer prices.”