The Institutional Risk Analyst

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Brian Barnier: Are Central Bankers Asking the Right Questions about “Inflation?”

May 6, 2021 | In this issue of The Institutional Risk Analyst, Brian Barnier ( and City University of New York) discusses why the "data dependent" analytical process used by the Federal Open Market Committee for measuring inflation may be measuring the wrong thing.

Price indices don’t really say what policymakers think they say.

Central bankers often act as though price index statistics are the same as the “generalized price level” of theory -- and the level is caused primarily by monetary factors. Yet, hard data and daily life – especially during COVID – show that this assumption is false. That means a 2% target of any flavor isn’t what the FOMC thinks it is. The Fed's 2% inflation target needs to be replaced in a specific way. And investors need to embrace the data in order for the measure to be credible.

“Monetarism” is widely debated. Oddly, the monetarist assumption of “inflation” is widely accepted. “Inflation” is assumed to be 1) change in generalized price level that is primarily caused by money supply (or at least monetary factors) and 2) that the “generalized price level” is statistically represented by a weighted aggregate average of product prices.

The Federal Open Market Committee looks to the Bureau of Economic Analysis’ (BEA) Personal Consumption Expenditures (PCE) Implicit Price Deflator. (Statistically more appropriate for monetary policy than the Consumer Price Index (CPI) used for Treasury Inflation-Protected Securities.) This index is calculated from hundreds of product prices obtained or imputed by the BEA, Bureau of Labor Statistics (BLS) and Census Bureau.

The Five Realities