Consider the Federal Reserve\'s target inflation rate of 2 percent. Prior to Jan

Question

Consider the Federal Reserve's target inflation rate of 2 percent. Prior to Janet Yellen, the Fed used the Consumer Price Index as a measure of inflation. Currently, they are using Personal Consumption Expenditures (PCE) a component of GDP when using the net expenditures approach. Do your own outside research beginning with www.federalresearve.gov.

1. What are the shortcomings according to Ben Bernake when using the CPI?

2. Why did Janet Yellen decide to use PCE?

3. What is the difference between the two rates of inflation and what is the impact of the Fed's current use of PCE?

Explanation / Answer

Ans

1 it doesn't measure more persistent underlying inflation but just transitory influences on price level

2 Because expenditure weights can be changed it includes more comphensive coverage of goods and historical pce data can be revised

3 pce measures inflation in core sectors only Whioeas cpi includes food and energy also. Thus cpi measure more accurately impact on consumer of price increase but pce is more goof for policy analysis. The impact is that fed doesn't now overreact and monetary policy has become more accurate.

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