OT Federal Reserve puts focus on new U.S. prices gauge (CPI out PCE in)

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Federal Reserve puts focus on new U.S. prices gauge

WASHINGTON, Feb 23 (Reuters) - Heightened Federal Reserve attention to a little-known prices gauge is making the statistic into a new star as the U.S. central bank ends its 20-year allegiance to the Consumer Price Index as a gauge of inflation expectations.

In its semi-annual report to Congress, called the Humphrey-Hawkins report, the Fed said that henceforth it would use the Commerce Department's personal consumption expenditures (PCE) index in place of the more familiar CPI compiled by the Labor Department when it makes inflation forecasts.

Based on last year's experience, it indicates even more muted inflation than previously thought.

The Fed decision was contained in a footnote to the monetary policy report first submitted to Congress last Thursday when Fed Chairman Alan Greenspan testified before the House Banking Committee and again on Wednesday when he appeared before the Senate Banking Committee.

In heightening the PCE index's profile, the Fed cited three advantages that it has over the CPI.

First, the PCE index's weightings are updated annually to reflect changes in spending so it eliminates what the Fed believes to be an upward bias in the fixed-weight CPI.

Secondly, the overall spending basket used in the PCE is broader so that the price gauge is more representative.

And finally, the PCE index is more easily revised to reflect changes in measurement techniques and new information than is the CPI. The CPI is never revised since it is itself a reference measure for such things as indexing cost of living changes in private-sector labor contracts.

A month-by-month comparison of the PCE index versus CPI throughout 1999, prepared by economist Lou Crandall of R.H. Wrightson and Associates Inc. in New York, indicates the PCE index generally shows a slower rate of price rises, or reduced inflation.

In eight out of 12 months, the PCE index rose less than CPI, Crandall noted, and the CPI increased by roughly half a percentage point more than the PCE index over the course of the full year 1999.

The PCE index, which covers spending on finished goods, services and structures in all sectors of the economy, is issued quarterly in the Gross Domestic Product measure issued by the Commerce Department.

In the period from the fourth quarter of 1998 to the fourth quarter of 1999, the PCE index rose 2 percent. On a quarterly basis, though, it rose in last year's fourth quarter at a 2.5 percent annual rate, up from 1.8 percent in the third quarter.

There is another way to get a quicker read of the PCE index's movement on a monthly basis, however, for those who do not want to wait for the quarterly figure in the GDP report.

It is included in the Commerce Department's personal income and spending report. The latest monthly deflator number, for December 1999, showed a rise of 0.2 percent compared with 0.1 percent in November.

Crandall suggested the real coming-out party for the PCE index would be next Monday, when its new importance will be clearly recognized in financial markets.

"Starting with the January personal income and spending report on February 28, we expect the PCE deflator to become as much a focus of attention as income or consumption spending," Crandall said in his latest weekly analysis.

© copyright 2000 Reuters, Ltd.

-- Possible Impact (posim@hotmail.com), February 23, 2000


Reporting inflation is bad, this is a solution.

-- Possible Impact (posim@hotmail.com), February 23, 2000.

I wonder if they will use this rather than the CPI for Social Security COLAs?

-- Lynn Ratcliffe (mcgrew@ntr.net), February 23, 2000.

Good, now they can reflect the cost of a new PC every year...

-- Mad Monk (madmonk@hawaiian.net), February 23, 2000.

Nothing lends credence to a total joke of an economic index better than coming up with an even bigger joke of an economic index to compare it against.

Modern economics, and therefore the tools of modern economics, ceased being a science the day they let the dollar float. Economics is no longer used to explain, manage, or predict anything, but rather to explain-away, justify, and rationalize an inherently inexplicable, unjust, and irrational monetary system.

With no external reference of value, all measurements are pointless at best or to be subject to endless manipulation at worst.

-- Nathan (nospamwh@tsoever.moc), February 24, 2000.

Notice the new index comes out quarterly rather than monthly like the CPI. Doesn't feel right to me.

-- CA 4x4 (4x4@my.house), February 24, 2000.

Exactly! You've explained it very well.

-- Possible Impact (posim@hotmail.com), February 24, 2000.

Nathan ... In the modern lexicon " Right ON , dude !" Eagle

-- Hal Walker (e999eagle@FREEWWWEB.COM), February 24, 2000.

Things must be getting bad enough that even the dilluted CPI was starting to reflect the actual economic problems we're seeing at the bottom of the house of cards. So now it's time for a new shell game. And when this one starts showing holes, they'll come up with anothe new scheme.

I wonder what they'll come up with to try and convince the sheep that there's no problem as everything collapses? Tie the next version of economic reporting to the price of stocks? (See, things are great! We've got NEGATIVE INFLATION since the stock market went down from 10,000 to 1,000. Don't you feel happy to live in President Klintoon's country?)


-- Wildweasel (vtmldm@epix.net), February 24, 2000.

Haven't heard anyone use the phrase 'smoke and mirrors' in a while. Just thought I'd throw that in.

-- canthappen (n@ysayer.com), February 24, 2000.

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