How to compare today’s inflation in the U.S. to the one in 1980s.
In the U.S. April’s inflation rate at 8.3% has been frequently compared to the level of inflation the U.S. experienced at the beginning of 1980, namely 14.8%. This comparison is useful to evaluate whether the current Fed is “behind the curve” and whether monetary policy needs to be tightened in a similar way as Paul Volker, Chairman of the Federal Reserve Board, did from 1980 to 1983.
In this paper, Bolhuis et al. argue that there have been important methodological changes in the Consumer Price Index (CPI) over time which distort comparisons of inflation from different periods. To better contextualize the current run-up in inflation, they construct a new historical series for CPI headline and core inflation that are more consistent with current practices and expenditure shares for the entirety of the post-war period. They use data from the U.S. Bureau of Labor Statistics (BLS). They find that current inflation, especially core inflation, is considerably closer to previous peaks than in the official series:
- The rate of core CPI disinflation caused by Volcker-era policies is significantly lower when measured using today’s treatment of housing: only 5 percentage points of decline instead of 11 percentage points in the official CPI statistics.
- To return to 2 percent core CPI inflation today will thus require nearly the same amount of disinflation as achieved under Chairman Volcker.
Comparing Past and Present Inflation
Authors: Marijn A. Bolhuis, Judd N. L. Cramer, Lawrence H. Summers
From: IMF, Harvard University
Factors affecting inflation risk
Most recent studies on inflation cover the period from the late 1980s, when inflation rates began to stabilize. But as inflation is picking up in advanced economies it becomes increasingly important to conduct analyses that include the “Great Inflation” period from the 1960s to the 1980s, when upside risks to inflation were a problem, in order to discuss the upside and downside risks to inflation
going forward.
In this paper, Makabe and Norimasa construct a long-term time-series panel spanning the period from the 1960s onward for the United States, Canada, Japan, and nine European countries and estimate the predictive inflation distribution using quantile regression models. They define the tail of the conditional predictive distribution of inflation as inflation risks and examine its behavior and determinants. Further, they estimate the “term structure” of the effect of each factor on inflation risks, which allows us to quantitatively examine the persistence of the effect. They find that:
- Unit labor costs and real government spending have a significant effect on the upward risks to inflation;
- The effect of import prices on inflation risks is short-lived, while the effect of real government spending and unit labor costs persists over the medium term.
The Term Structure of Inflation at Risk: A Panel Quantile Regression Approach
Authors: Yoshibumi Makabe, Yoshihiko Norimasa
From: Bank of Japan
