Infl ation Measurement for Central Bankers

Interest in the measurement of infl ation has increased signifi cantly in recent years for a number of reasons. First, infl ation rates have fallen signifi cantly since the early 1980s. Second, many central banks have adopted infl ation targets. The combination of these two factors has increased the importance of accurate measurement. Third, rapid quality improvements, particularly in the information technology and health sectors, have made accurate measurement more diffi cult. The fi nal impetus was provided by the Boskin et al (1996) report which claimed that the US consumer price index (CPI) has an upward bias in excess of 1 percentage point per year, while at the same time pointing out the dramatic budgetary implications of this bias, which arises from the fact that about one-third of federal expenditure in the US is indexed to the CPI.