NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How Much Do Official Price Indexes Tell Us about Inflation?

Jessie Handbury, Tsutomu Watanabe, David E. Weinstein

NBER Working Paper No. 19504
Issued in October 2013
NBER Program(s):   EFG   ME

Official price indexes, such as the CPI, are imperfect indicators of inflation calculated using ad hoc price formulae different 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. We use the largest price and quantity dataset ever employed in economics to build a Törnqvist inflation index for Japan between 1989 and 2010. 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. We show the informativeness of the CPI rises with 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. Outside this range, the CPI is a much better measure of inflation. We find that the U.S. PCE Deflator methodology is superior to the Japanese CPI methodology but still exhibits substantial measurement error and biases rendering it a problematic predictor of inflation in low inflation regimes as well.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19504

Users who downloaded this paper also downloaded these:
Amiti and Weinstein w18890 How Much do Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data
Yermack w19747 Is Bitcoin a Real Currency? An economic appraisal
Jordà, Schularick, and Taylor w19506 Sovereigns versus Banks: Credit, Crises, and Consequences
Goryunov, Kazakova, Kotlikoff, Mamedov, Nesterova, Nazarov, Grishina, Trunin, and Shpenev w19608 Russia’s Fiscal Gap
Carlino and Inman w19559 Macro Fiscal Policy in Economic Unions: States as Agents
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us