In the opening remarks from a Sept 4th and 5th Bank for International Settlements conference, “Indicators to Support Monetary and Financial Stability Analysis: Data Sources and Statistical Methodologies”, BIS Deputy General Manager Hérve Hannoun stressed the need for central banks’ “intense review” of inflationary measurements as a means for providing reliable statistical data for monetary policymaking. We give a read of Hannoun’s speech for what this actually means.
Addressing an international audience of central bank statisticians and national regulatory authorities, Deputy Hannoun’s published remarks laid the groundwork to debate the concerns of a looming European deflation, as discussed by the financial industry and press reports. Some example can be found in the Daily Mail’s “US sees Europe deflation risk, plans G20 bid to boost global demand”, Daily Mail Online, September 12, 2014, and “Nightmare of debt deflation stalks Europe”, Financial Times, August 24, 2014. In particular, he states that the conference focus of new monetary policy indicators is topical “given the vigour of the current debate about the supposed threat of inflation.”
While examining the “downward trend” in the inflation of the advanced economies from 2011-to-date, Deputy Hannoun attributes the visible changes in “headline inflation”, or CPI, to the known volatility of commodity prices. In addition, he notes stability in “core inflation”, which excludes food and energy prices.
This is the second time that the BIS is looking seriously at CPI calculation methodologies; the first in 2006 produced a list of issues, many of which remain unresolved:
| 2006 CPI Calculation Issues & Recommendations | 2014 CPI Calculation Issues |
| The need to publish a standardized CPI Manual. | The CPI Manual published as a result of the conference findings requires a more normalized method for calculating CPI. While this initiative is currently underway, the current Manual limits the comparability of CPI measurements across jurisdictions. |
| Inaccuracies in weighting European owner-occupied housing in the absence of a standardized price index at that time. | This has not yet been addressed. |
| Central bank research indicated a positive bias in official CPI measures. However, there were no available measurements about the size of this bias. | There is uncertainty as to whether a measurable bias exists in official CPI statistics. |
| Communicating CPI measurements to the public (i.e., fostering public understanding). | Consumer surveys reflect a large gap (6 %) between consumer-perceived CPI and that measured by statisticians. |
Hannoun also asserts that the measurement of inflation expectations can be misunderstood and is easy target for “overhasty interpretations”. Referring to BIS calculations from 2007-2014 for the Euro area, the US and the UK, he discusses the two main market indicators of inflation expectations – breakeven inflation rates from index-linked bonds and inflation swaps. It is these indicators that are currently being used, by financial markets and the media, as the basis for European decline in inflation. Believing that historical perspective, a.k.a. the financial crisis of 2008, has magnified fears, Hannoun’s resultant analysis may allay them. He admits that index-linked bonds and inflation swaps can be volatile in the short term, while also stating that the long-term inflation expectations in the US (2.5-3.5%) and Euro zone (2-2.5%) “…are relatively well anchored.”
While Hannoun’s address reflected a tempered view of European inflationary statistics, the European Central Bank has identified slow recovery and geopolitical risk as catalysts its readiness “to use additional unconventional instruments within our mandate, and alter the size and / or the composition of our unconventional interventions should it become necessary to further address risks of a too prolonged period of low inflation”, according to ECB President Mario Draghi on September 22, 2014. The upshot here is that the data matter – the BIS is right to get serious about its data measurement tools and build mechanisms for a more granular and careful analysis.