Fed says "forces" keep inflation down - he is more than correct on this one

Friday, May 06, 2005

Bloomberg has an interesting statement from Fed Chairman Alan Greenspan, republished in today's New York Times. According to the report worldwide forces are keeping inflation low, he said, adding "it is clearly a phenomenon which not only exists in the US but pretty much around the world: that is, low real long-term interest rates". "What we are observing is an underlying set of pressures which is a major factor causing disinflationary forces worldwide in the past decade." Greenspan did not elaborate on the "forces" and "pressures" during his remarks. Well, if you stand next to a gas pump or sit in a restaurant, you might wonder what these forces might be as they cannot be seen on your bill.
But there is a very simple explanation: In the US it is called "hedonic changes" in the calculation method of consumer prices. In Europe it is called "re-indexing" the basket of good that is the basis for CPI calculations since the introduction of the single currency. I have elaborated about these tricks in this post.

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