Changes to the construction of the consumer-price index have distorted comparisons
. Consumer prices in May were 8.6% higher than a year earlier—the greatest increase since 1981. Petrol prices, in nominal terms, are at a record high. And geopolitical tensions are weighing on economic growth. One source of comfort is that May’s official reading pales in comparison with the Great Inflation that American consumers endured during the 1970s and early 1980s. But new research suggests that comparing past and current levels of inflation in America may be misleading.
Such comparisons are fraught because of methodological changes made to the consumer-price index in the 1980s. For decades the housing portion of thewas estimated based on the costs incurred by homeowners, including house prices, mortgage rates, property taxes and maintenance costs. But government statisticians eventually realised that this approach overstated the true cost of housing. It produced a volatile measure of housing inflation that fluctuated with interest rates .
To understand how this change may have distorted historical inflation, the paper’s authors, Marijn Bolhuis, Judd Cramer, and Larry Summers, a former treasury secretary, reconstructed the’s current method for estimating housing costs. They found that the double-digit inflation of the 1970s was in fact lower and less volatile than the official data would suggest: the 14.8% peak rate recorded in March 1980 would have instead come in at 11.4%. The peak core inflation rate of 13.
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