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Distance to inflation target

In a recent St. Louis Fed On the Economy blog post, I plotted the distance from the inflation target for 9 advanced economies in January 2014. Instead of looking at a cross-section of countries, we could look at the time series for the United States or any other economy for which we know the target and have a time series in FRED. Several countries set their inflation target at or close to 2% as measured by the year-on-year growth of the consumer price index (a Laspeyres index). However, the U.S. Federal Reserve uses the personal consumption expenditures price index (a Fisher Ideal quantity index). To understand the difference between the two, see this BLS paper: “An Examination of the Difference Between the CPI and the PCE Deflator.”

For a recent take on the advantages of using one measure over the other, see St. Louis Fed President Jim Bullard’s article in the Regional Economist, “CPI vs. PCE Inflation: Choosing a Standard Measure.”

In the graph, I plot the difference between the actual inflation rate (measured in either CPI or PCE) and the inflation target in the United States as discussed in the “Statement on Longer-Run Goals and Monetary Policy Strategy.”

This target is typically considered a medium-run objective, so it is normal to observe short-lived deviations from the target. However, inflation in the United States has been below target for quite some time, and it is an open question when it will return closer to the 2% target (close to the zero line in the graph).

How this graph was created: First, load the two series. Then for each series, select “Percent change from year ago” as the unit of measure and use the “Create your own data transformation feature” and enter the formula “a-2.” Finally, in the graph settings, select type “Area.”

Suggested by Silvio Contessi.

View on FRED, series used in this post: CPIAUCSL, PCEPI

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