Issues of inflation measurement are fundamental to the conduct of monetary policy. Price indices form the foundation of central bank policy frameworks around the world. They serve as guides to decision-making, as well as providing the primary mechanism for holding independent policymakers accountable. To shed some light on the role of inflation measurement, the annual meeting of Deputy Governors of emerging market economies (EMEs), held in Basel on 5-6 February 2009, explored three issues: price indices used by central banks; the role of wages and productivity in inflation policy; and the measurement and assessment of inflation expectations. This volume contains contributions by senior central bankers and BIS staff. The issues are summarised in an overview chapter by Stephen Cecchetti.
Price indices used by central banks. The primary price indicator or target of EME central banks is headline CPI, supplemented by other indicators. At least two issues of measurement arise. The first is transitory phenomena, or noise, that should not affect policymakers' actions. Many central banks deal with noise by using measures of underlying or core inflation that exclude certain prices from computation in the index. The second issue is measurement biases, related to the way in which individual prices are weighted together to form an aggregate index (weighting bias; eg substitution bias); or due to actual errors in measuring the individual prices themselves (eg quality or new goods bias).
Wages, productivity and structural inflation. Wages are a key element in the inflation process: wage growth equals productivity growth plus inflation and real wage growth that is in line with labour productivity growth is widely seen as a precondition for macroeconomic stability. In EMEs, a close relationship between real wage growth and labour productivity growth helps preserve external competitiveness while limiting inflationary pressures and the risk of a wage-price spiral developing. The adoption of inflation targeting frameworks by many emerging market central banks has provided an incentive to compile better labour market data and has enabled central banks to use productivity and unit labour costs more widely in their inflation forecasts. Other aspects of the role of wages in inflation are highlighted by two-sector models of differential productivity growth in tradable and non-tradable industries. One implication is that the rate of wage increase will depend on wage increase in the tradable sector. Another is that inflation sometimes reflect productivity growth in tradable industries, so not all inflation in rapidly-growing EMEs is necessarily undesirable or avoidable.
Inflation expectations and monetary policy. Three issues may be highlighted that are discussed in this volume drawing on EME experience: (i) How central banks measure inflation expectations and use such measures; (ii) the relationship between inflation expectations and the costs of disinflation; and (iii) whether monetary policy frameworks are effective in anchoring inflation expectations. Measurements of expectations draw either on surveys (of households and businesses, professional forecasters and financial market participants) or financial markets (eg the difference in return between an inflation-linked bond and a nominal rate). As for the costs of disinflation, these are related to inflation persistence, which can in turn be related to expectations (eg backward-looking, or reflecting limited information about central bank objectives). Finally, the experience of central banks suggests that inflation expectations have been better anchored in this decade.
|Overview of "Monetary policy and the measurement of inflation: prices, wages and expectations"||EN|
|Some issues in measuring and tracking prices in emerging market economies||EN|
|Wages, productivity and "structural" inflationin emerging market economies||EN|
|Inflation expectations, persistence and monetary policy||EN|
|Monetary policy and the measurement of inflation||EN|
|Survey-based inflation expectations in Brazil||EN|
|Terms of trade, commodity prices and inflation dynamics in Chile||EN|
|Assessing inflationary pressures in Colombia||EN|
|Inflation expectations under Czech inflation targeting||EN|
|Measures of trend inflation in Hong Kong||EN|
|Monetary policy under import price shocks: the case of Hungary||EN|
|Monetary policy in response to imported price shocks: the Israeli case||EN|
|Measures of core inflation in Korea||EN|
|On the predictive content of the PPI on CPI inflation: the case of Mexico||EN|
|Measurement of price indices used by the central bank of Peru||EN|
|Measurement of inflation and the Philippine monetary policy framework||EN|
|To what extent can we trust core inflation measures? The experience of CEE countries||EN|
|Monetary policy and the measurement of inflation: prices, wages and expectations - Saudi Arabia's case||EN|
|Monetary policy and the measurement of inflation: prices, wages and expectations - a South African perspective||EN|
|Monetary policy and underlying inflation pressures: the essence of monetary policy design||EN|
|Difficulties in inflation measurement and monetary policy in emerging market economies||EN|