Do Price Indexes Tell Us About Inflation? A Review of the Issue
Keith M. Carlson discusses the broad issues involved in defining inflation and using U.S. price indexes to measure it. The indexes are examined from two perspectives: that of the individual attempting to maximize his well-being, and that of the policymaker attempting to control inflation. The author concludes that, to measure and analyze inflation properly, more information is required than these conventional price indexes provide. A theoretical measure of price change would include the prices of assets, which serve as proxies for the prices of future consumption services. From a policymaker’s perspective, the author concludes, no one price measure has performed consistently better than another since 1952 when compared with the Friedman measure of money relative to trend output.