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March-April 1967
NEBR.
M-ONT-HLY REVIEW
KANS.
The Budget, Fiscal Action, and
Short-Run Economic Change: Part 2 . . . page 3
A Look at Some Measures
of Inflation . . . . . . . . . . . . . . . page 11
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The Budget, Fiscal Action, and
Short-Run Economic Change: Part 2
By Glenn I-I. Miller, Jr.
on
of the impact of F d ral fisFcal
operations on over-all c onomic tivity,
THE ST DY
a
the cff cts of l• cckral transactions may be
s parat cl into lwo hroad class s: incom cff cts and liquidity ff ts. In om ff ts may
be said to result from current account transactions, wherein Government activities directly affect private aftertax income, which,
in turn, is the primary determinant of private
spending. At the same time, important relationships exist between asset holdings and
current spending, whereby the amount and
the composition of asset holdings also influence private cffectiv d mand. Certain Fed'ral transactions, through ffects on th structure of int rest rates and asset prices, may lead
to an altered composition of financial assets
and liabilities in the private sector and henc
to changes in th e private ability to spend.
These indirect effects on private spending
exerted through financial markets may be
termed liquidity effects. It often is maintained
that the national income and product accounts
( NIPA) budget better presents the income
effects of Government operations, while the
cash budge t ( which includes Federal financial transa ction not pr s nt in the
IPA
budget) b tter pres nts the liquidity effects.
In addition to th e exclusion of Federal financial transactions from the national income
budget, the use of accrual accounting concepts
there, in contrast to the cash basis of the cash
Monthly Review
•
March-April 1967
budget, also adds to th income effect v rsus
liquidity effect distinction b etween th two
hndgels. In fa ct, lhc logi · for trea ting om'
it<'ms on an a· nial hasis in th N I PA bucl g ·t
rath r than on a cash basis "is to differ ntiate
b twe n those forces working through incomes and those forces working through assets and liabilities." 1 It may be concluded
that for the study of fiscal impact ( narrowly
defined as Government operations leading to
an income effect on the private sector), and
therefore for fiscal policy purposes, the NIPA
budget is a sup rior measure and tool of
analysis. But when an analysis of the liquidity
effects of Gov rnm ent op rations is required,
the consolidated cash budge t frequently is
judged to be more appropriat .
TIMING DIFFERENCES BETWEEN THE
NIPA AND CASH BUDGETS
Because of the timing differences in recording receipts and expenditures under the cash
and accrual methods of Government accounting, different time patterns for Federal expenditures, receipts, and surpluses or deficits
arc obs rv d in th quarterly data. Us of
quart ,rJy data r v als differ nc s betw n
IPA and ash budget data, in size and even
1
Joseph Scherer, " On Measuring Fiscal Policy," The
Journal of Fi nance , December 1965, p. 686 .
3
The Budget, Fiscal Action, and
in direction of changes, that may b e concealed
when only annual data are used.
Recorded budget surpluses or deficits result from the netting of receipts against ex·penditures, thus differences in timing of surpluses or deficits depend on nonoffsetting
timing differences in receipts and expenditures
in each of the two budgets. On the basis of
the seasonally adjusted data, most of the timing differences are found on the receipts side
of the picture. And within the receipts data,
corporate profits taxes contribute more to
those differences than do personal income
taxes and social insurance contributions.
Corporate Income Tax Receipts
ash paym ~nts of corporat n t income
taxes lag behind the accruals of tax liability.
Thus corporate tax receipts in the cash budget
( entered on a cash-received basis) lag behind corporate tax receipts in the N~PA
budget ( entered on an accrual basis). Because
this time lag leads to a difference in the time
at which corporate tax receipts are recorded
in the cash and the NIP A budgets, and hence
to a difference in the time patterns of total
receipts and of surpluses and deficits , the
question arises in short-run economic analysis
as to which budget shows the more appropriat time sequence of the impact of Federal
fiscal action on the economy. The argument
revolves around the question of when the
corporation truly feels the "bite" of diverting
some of its gross income to the Federal Government in taxes.
The rationale for using an accrual basis in
the NIPA budget rests on the assumption that
the disposable income of households and businesses is the mos t important determinant of
private spending and hence of over-all economic activity. Thus, the income effect of
Federal transactions is best timed by recording the private liability or earning involved
when it accrues, since this is the time that the
private income stream feels the impact ( i.e., it
4
is the time when the private decisionmaker
adjusts his behavior to take account of the
change arising from the Federal transaction).
Since corporate managements think of income in accrual terms, income tax liabilities
are thought of as claims against income at the
time they are incurred, even though payment
may not be due until later.
Therefore, it seems reasonable to treat the
inroads of corporation income taxes into
disposable corporate incomes on an accrual
basis for fiscal policy analysis. 2
This is, of course, the way receipts are treated
in the NIPA budget. Hence, the argument
goes, since changes in disposable corporate in·om dire ·tly influ en ·e bus.iness sp nding and
ther by affc t total income and output, in
order to determine th e direct impact of Federal fiscal action on over-all economic activity,
one must use a measure that correctly times
that impact on private income-namely, the
NIPA budget.
As far as the corporation is concerned, the
balance sheet item known as tax liability ". . .
represents the Government's share in earnings
left in the business for the brief period between accrual and payment." 3 Although tax
liabilities serve as temporary sources of funds
for corporations, corporate managements do
not view these tax liabilities as unencumbered
funds with which they may do as they please.
The lag of tax payments behind accruals is
likely to lead corporations to cover their accrued, but unpaid, tax liabilities with shortterm liquid assets, such as Treasury tax-anticipation bills or certificates of deposit, thereby
indicating that the corporations realize that
the tax liability is not disposable income nor
a p ermanent source of funds .
2
"Federal Receipts and Expenditures- Alternative
Measures," p. 5.
3
Horry A. Guthmonn and Herbert E. Dougall , Corporate
Financial Policy ( 3d ed .; New York: Prentice-Holl,
1955),p.455.
Short-Run Economic Change: Part 2
The lag between tax liability incurred and
payments made gives rise to a set of financial
flows, or asset and liability exchanges. Government extends short-tem1 credit in the form
of unpaid tax liabilities, then may have to increase its short-term debt to finance its activities until the time taxes are paid. Both of
these actions affect the composition of assets
and liabilities in the private sector, as does the
reversal of the process that occurs when tax
payment is made. And these changes are
likely to have indirect effects on private
spending and, hence, on income and output
in the economy.
Those who emphasize the cash b11dgct figur 'S in analyzing the jmpact of F dcral re. 'ipts and cxp cnditur s on economic a tivity
Jean toward the assumption that, in the case
of the corporate profits tax, the cash basis
approach of the consolidated cash budget
better represents economic reality than the
accrual approach.
There are good reasons for believing that
there is no bite quite so strong as an actual
cash payment. This is clearly suggested by
the unfavorable response to the proposal to
accelerate corporate tax payments to 100
per cent of estimated profits in the year the
profits are earned .. . . Similarly, the fact
that there are always some corporations
who borrow from banks at tax date to pay
their profits tax also suggests that the
reality of the payments bite is significan tly
greater than the accruals bite. 1
It is likely that the income effect from incurring a tax liability and the liquidity effect
of making a tax payment both have some impact on over-all private economic activity.
Perhaps the distinction remains one of differences between direct effects on income and
output due to changes in income flows and
indir ct effects from changes in the composition of assets and liabilities. This argument
leads back to the conclusion that an analysis
of both the cash budget and the NIPA budget
4
. . . much of the economic impact of corporation income taxes occurs at the time the
liability is accrued, rather than when the
payment is actually made. This is not to
say that the payment flows are irrelevant,
for they do withdraw funds from the shortterm capital market. Thus, analyses of the
investment plans of corporations are carried
out better with the accrual concept, but
analyses of the trends in the capital markets
are bett r done with a cash concept. 5
Th Jag of cash payments of corporate net
in ·om ta cs behind the accruals of lax ]iahility Jias Jessen d onsidcrabJy as a r sult of
recent tax J gislation. Before th 1964 tax Jaw
went into effect, the average lag was estimated at about 6 months. However, ·legislation passed in 1964 and modified in 1966 is
bringing corporate tax payments to a more
current basis. For the taxable year beginning
in 1967 or any subsequent year, the entire
amount of the estimated tax due must be paid
during the taxable year, according to a schedule of instalment payments that depends on
when in the year it becomes evident that the
corporation's tax liability is such as to require
estimation ( i.e. , is greater than $100,000).
Even then, however, there will be some timing
difference between accrual and payment,
since the residual liability will remain to be
paid following the end of the taxable year.
THE BUDGET POSITION AN D
ECONOMIC ACT IV ITY
Realized Budget Positions
We have noted that differences between the
N IPA and the cash budgets in the timing of
surpluses and deficits have occurred primarily
5 Otto Eckstein, "On Choice of Concepts for the Federal Budget," The Review of Economics and Statistics,
Vol. XLV, No. 2 (May 1963), p. 127 .
Scherer, p. 687.
M o nthly Review
is necessary for a complete picture of Federal
impact on the economy-the one permitting
us to view liquidity effects; the other, income
effects. For example:
•
March -April 1967
5
The Budget, Fiscal Action, and
because of differences in the timing of receipts
( due in turn largely to the accrual versus cash
treatment of corporate profits tax receipts).
ow let us return to a consideration of the
impact of Federal Government operations on
over-all economic activity as measur d by
budget deficits and surpluses. In Chart 3 of
Part I of this article, the actual budget surpl uscs or deficits for calendar year quarters
are presented according to both the cash
budget and the national income budget. For a
given period, or point in time, a Federal
budget deficit is often r garded as an xpansio11ary influcn e on the economy; a surplus,
as a restrictive influence. Based on this simple,
somewhat rncdianistic, vicw- sornclirncs called
a cross S(' ·lion approach- th influ nee of
Fed 'ral fiscal action in the curr nt upswing
appears more expansionary when measur d by
the cash budget-in surplus 2 quarters, in
deficit 21 quarters-than when measured by
the IPA budget, which was in surplus 8
quarters and in deficit 15 quarters.
But economic analysis is at least as much
concerned with changes in the level of economic activity as with the level of activity at
a particular point in time. And when viewing changes over tim - that is, when omparing on period with another-a consideration
of changes in th budget position betw en
periods may improve the analysis of the
changing influence of Federal fiscal action.
Introduction of the time dimension suggests
that th e budget may exert an expansionary influence through an increase in the size of a
deficit or through a decrease in the size of a
surplus; and it may exert a restrictive influence through a decrease in the size of a deficit
or through an increase in the size of a surplus.
The first of th -se may he t rmed a movem nt
toward deficit; the second, a movem nt toward
surplus.
An example of the use of the change in
budget position over time as a measure of the
Federal impact on the economy is found in
6
what has been characterized as the short and
incomplete recovery of 1958-60. One part of
the explanation of the brevity and incompleteness of that recovery rests on the resh·ictive
effects on economic activity of the sharp turnaround in Federal finances. The recovery
period lasted from the cyclical trough in
April 1958 to the cyclical peak in May 1960.
Within that period, the Federal budget position changed on a NIPA budget basis from a
deficit of $12.4 billion in the second quarter
of 1958 to a surplus of $7.1 billion in th first
quarter of 1960. On a cash budg t basis, there
was a ·hangc from a deficit of $1.5.2 billion in
the first quarter of 19.59 lo a surplus of $4.3
billion in the second quarl<'r of 1960. (All
figures arc on a seasonally adjust ·cl annual
rat, basis.) Thus, the lPA budget position
moved just slightly less than $20 billion in a
restrictive direction over 7 quarters, while the
cash budget changed nearly $20 billion in a
restrictive direction over 5 quarters.
othing quite so dramatic is observable in
the data on changes in the Federal budget position for the period since 1961 ( Chart 6). Of
th 22 quarterly changes in the pe1iod, the
Government's cash budget position, as shown
hy the actual surpluses or deficits record d ,
chang ·cl toward surplus ,] 'Ven times, mov cl
toward deficit ten tim s, and showed no
change once. The NIPA budget's surplus/defi·it position has shown quarter-to-quarter
changes toward surplus fourteen times and
toward deficit eight times since the first quarter of 1961.
The over-all trend from 1961-I to 1966-III
in the Federal budget position on a national
income accounts basis was cl arly toward
surplus. That is, the F d ral budget on a
IPA basis appar ntly has tend d to b come
more r strictive as the expansion has continued. The over-all movement of the cash
budget position also shows some slight tendency toward an apparently more r strictive
influence, especially from 1961-I to 1965-II.
Short-Run Economic Change: Part 2
The direction of movement since mid-1965 is
less clear, however. The wide quarterly swings
in 1966 apparently reflect the acceleration of
corporate tax payments, along with certain
other ad justments in tax receipts. This suggests a change in the seasonal pattern of cash
receipts which has not yet been taken into
account in the seasonal adjustmen t of the data.
Full-Employment Budget Surplus
Although the analysis of th e economic impact of the budget may be improved by regarding the chan ges in the realized surplus/
dcfi it position ov r time, this standard is
slill not sufficient for c:o mpl ctc understanding.
Tli' reason for reject in g acl11al observed sm Chart 6
FEDERAL SURPLUS AND DEFICIT, 1961-66
Billions of Dollars
+20
Quarterly, Seasonally Adjusted Annual Rates
+15
+10
Consolidated
Cash Budget
+5
pluses or deficits as sufficient indicators of
the impact on the economy of Government
operations may be expressed rather simply.
Not only does the budget affect the economy,
but actual budget positions are themselves in
turn affected by the b havior of th e economy.
That is, for any given bud ge t structure ( a
particular set of tax and exp enditure programs) th e actual size of the budget surplus
( or deficit ) d epends on the level of total
economic activity.
Thu s, for any particular year, an economy
operating at full employment may give a
bud ge t surplus, while the same economy
operating at G per cen t 11nemploymcnl,
with the same exp 11clil11rc ancl lax programs, w ill probably show a sizable budget
defi c it. Ii
T his implies, of co urse, that budget dcfic:ils of
the same size may mean differen t things about
th e impact of Federal fiscal action in differen t situ ations, d epending on th e levels of
economic activity involved and on the budget
structures underlying the Government operations.
Thus, a large budget d efi cit which appears
to b e very exp ansion ary may, in fact, be
merely the e nd result of a hi ghl y restrictive
budge t struc ture which depresses boll1 economi c ac ti vity and Gov ' rnm cnt rcven ucs. 7
0
-5
- 10
- 15
But how then is jt possible to determine
how restrictive a given budget structure really
is? This is where the concept of the fullemployment budget surplus enters the picture.
Since tax revenues and some expenditures
depend on the level of economic activity,
there is a whole range of possible surpluses
and deficits associated with a given budget
program. The particular surplus or deficit
+20
+15
Full Employment
Budget
+10
+5
*
0- 5
6 J oseph
Scherer, " A Primer on Federal Budgets,"
Monthly Review, Federal Rese rve Bank of New York,
April 1965, pp . 87-88.
* 196 1
Not Ava, la ble
SOURCE : U. S. Treasury Department , Treasury Bulletin; U. S.
Department of Commerce, Survey of Current Business; and
Federal Reserve Bank of St . Louis, Federal Budget Trends.
Monthly Review
•
March -April 1967
7 "Supplementary Statement by Michae l E. Levy" in
U. S. , Cong ress, The Federal Budget as an Economic
Document, Hearings before the Subcommittee on Economic Statistics of the Joint Economic Committee, 88th
Cong ., l st Sess ., 1963, p. 230.
7
The Budget, Fiscal Action, and
in fact realized will depend on the level of
economic activity. 8
Therefore the realized budget surplus or
deficit cannot be taken as an accurate measure
of the amount of fiscal stimulus being provided. In order to distinguish between the
influence of discretionary Federal actions on
the economy and the response of Gov mm nt
revenues and expenditures to over-all economic activity, the size of the surplus ( or
deficit) for a particular budget program is
estimated at a fixed level of economic activity
- the full- mploym nt level.
The ful1 - mployment budget surplus is
an es ti mat of th hudg t out ·om for any
giv 'n buclg t slru ·lur , ass111n in g that th ·
'Conorny is at full •111ploym nt. ... By ' 'li maling the n t surplus or d fi ·it of cliff r nt
budge t structures for the assum cl full-employment level of activity for any year, it is
possible to measure the relative restrictiveness of these different structures, i.e., the
budget strncture with higher foll-employment surplus is taken to be more restrictive
than budgets with smaller surpluses ( or
deficits) .9
The analytical background for the foregoing
concise explanation of the measure and its use
may be outlined as follows. The correct position for a stabilizing F ed ral budg t is on
that, at full mploym nt, provid -s a larg
enough surplus ( i.e., enough Government
saving) to exactly offset th e diff rence between private investment and private saving.
If the full-employment budget surplus is
greater than that amount, aggregate saving in
the economy will be too large and total economic activity will be depressed ( perhaps
enough so to lead to an actual budget deficit ).
If the full-employment budget surplus is too
small ( i.e., less than an amount that exactly
8 Economic Report of the President (Washington : U. S.
Govern ment Printing Office, 1962), p. 79 .
9 Scherer, "A Primer on Federal Budgets," p. 88. The
full-employment surplus discussion is focused on the
income effects of Federal fiscal action and is carried
on within the context of NI PA budget concepts.
8
offsets the difference between private investment and private saving), aggregate saving
in the economy will be too small ( given the
amount of private investment) and total economic activity will be increasingly stimulated
( perhaps to the extent that inflationary pressures will develop). The important point here
is that the r levant analysis is full-employment
analysis. This means that the budget position
at a noninflationary, full- employment level of
economic activity-not the actual surplus or
deficit, or changes therein- is the focal point
for analysis of the impact of Government operations on economic activity.
Sin · lh siz' of th full - mploym nt surplus approprial' for acl ,icving lh ' goal of full
·rnploym nt with stable pri · 'S is an amount
just equal to the excess of privat investm nt
over private saving, deviation from this
amount of full-employment surplus will have
either expansionary or restrictive effects on
over-all economic activity.
The full employment surplus is a measure
of the restrictive or expansionary impact of
a budget program on over-all demand.
Generally speaking, one budget program is
more expansionary than another if it has a
smaller full employment surplus ....
If the full employm nt surplus is too
larg , relative to th e str ngth of private d mancl, c onomi activi ty falls short of potential.
orrespondingly, the budget surplus actually realized falls short of the full
employment surplus; indeed, a deficit may
occur. If the full employmen t surplus is too
small, total demand exceeds the capacity of
the economy and causes inflation. 10
The following example may help to clarify
the point. Full-employment income would
yield a certain estimated amount of revenue
at giv n tax rates. This rev nue, along with
existing spendin g programs, would give a
particular surplus, say, $20 billion. Bence,
with national income at its full-employment
level, the Government would be withdrawing
10
Economic Report of the President, l 962, pp . 80-81 .
Short-Run Economic Change : Part 2
$20 billion more from the economy than it
would be putting back in expenditures. With
such a F ederal budg t surplus, full employment could be reached only with very strong
private demand. If private demand were not
strong enough to purchase the output of a
full- mploym nt onomy, then income would
not r ach its full-employment 1 vel, and tax
r c ipts would not be hug enough to provide an actual $20 billion budget surplus.
With too large a surplus at full employment
implicit in the budget, income would be below its full- mploym 'nt 1 vel, and tax rec ipts
would b e b low th ir proj cted l v l, as w uld
th budg ' t surplu s. In short, th tax rates
a11<l •xp •n litur' programs making up th'
bud get strnctur ' wo uld h in ons ist nt with
the a hi vement of full mployment.
Emphasis on the significance of F deral
fiscal action, in achieving the goal of full employment with stable prices, should not be
allowed to obscure the importance of the relationship of the budget structure to private
demand. The goal of a stabilizing budget
policy is, after all, to offset destabilizing movem nts in the private sector. This remains true
when attention is shifted from the actual
budg t position to the full - mploym nt budg t
surplus. The proper siz of th full- mployment surplus will cliff r from tim to tim as
underlying private demand varies. vVhen private demand is xceptionally strong, a relatively large full-employment surplus is likely
to be consistent with full employment and no
inflation, while very weak private demand
might require a relatively small full-employment surplus-and perhaps even a deficit. In
th words of th
ouncil of Economic
Advis rs:
The appropriate size of the surplu or
d fi it in the full - mploym nt budget depends on the strength of private demand
and its responsiv ness to fis cal policy. Th
budget must coun terbalance pri vate demand. The weaker the underlying determinants of private demand, the more exp an-
Monthly Review
•
March -April 1967
sionary the budget should be; the stronger
the determinants, the more resh·aining the
budget should be.11
Budget policy is not the only Governm nt
policy that affects th private economy and
the behavior of over-all economic activity.
Mon tary policy also has an important influence on private demand, and differ nc s in
mon tary policy ther fore may influence the
appropriat size of the full- mploym nt surplus. An xpansionary monetary policy that
strength ns priva te demand p rmits a larger
full- mployment surplus than a mor r striclivc mon tary poli ·y that w akcns privat demand. ( "The lighl cr lh c mon •lary poli ·y, th ,
sn1all 'r th ' bud g ' t surpl us ·ons ist ·nt wi th full
cmploym ·nt, and vi , ' versa.") t :! Thus, wh n
oth r policy variables, and oth r factors such
as the distribution of income, are brought into
the picture, it b comes evident that a number
of different sizes of the full-employment surplus may be consistent with one level of fullemployment income.
Finally, it should be noted that, with an unchanged budget structure ( i.e., with unchanged tax ra tes and expenditure programs) ,
the amount of the full- mploymen t surplus itself will incr as ov r tim as
P grows.
As full-employm nt G P 1rows, tax r venue
yield d by a giv n set of tax rat s also will
grow, as will the budget surplus with no
change in spending programs. An unchanged
full-employment surplus is not an indication
that no discretionary fiscal action has been
taken. In fact, discretionary action, in the
form of increased spending or reduced tax
rates, is necessary to hold constant the amount
of the full-employment surplus.
Just as in th case of the actual budget
surplus/ deficit position, ith r a cross s ction
11
Economic Report of the President, 1964, p. 42.
12
Charles L. Schultze in U. S., Congress, Current Economic Situation and Short- Run Outlook, Hearings before the Joint Economic Committee, 86th Cong ., 2d
Sess., 1960, pp . 120- 121.
9
The Budget, Fiscal Action, and Short- Run Economic Change: Part 2
or a time series approach may be adopted
with regard to the question of the impact of
the full-employment surplus.
At any given time, the larger the surplus at
full employment, the more restrictive is fiscal policy; changes in the full-employment
surplus or deficit indicate whether fiscal
policy has , on balance, moved in an expansionary or a restrictiv direction .13
In Chart 6, a decline over the course of the
present expansion in the size of the full-employment surplus is exhibited, coincidental
with the tendency toward surplus of the actual
IPA surplus/d ficit position. Thus, fiscal
policy app ars to hav had an incr asingly
rcstric.:tiv' effect when measured by th movcm 'nt of the realized surplus, but a de ·id ,d ly
expansionary dfc 't wh n mcasur cl by the
trend of the full-employment surplus. This
is another example of the seeming paradox
identified by Solomon "as to whether the
budget becomes more or less restrictive when
the full-employment and actual surplus or deficits move in opposite directions." 14 He observed such a pattern for calendar 1961 and
noted the necessity of reconciling two conflicting observations: actual budget results
which apparently were increasingly restrictive, and a declining full-employment surplus
which suggested that fiscal poli y was becoming mor expansionary.
As Solomon conclud d ( and as implied
earlier in this article), the answer to the paradox is "that the realized budget results [are]
13
Economic Report of the President, 1965, p. 63 .
misleading as an indicator of the influence of
fiscal policy . . . since the realized budget reflects the economy's influence on the budget
as well as the budget's influence on the economy." A nondiscretionary movement toward
deficit, as a response to lower rates of economic activity, should not be regarded as
stimulating aggregate d mand.
On the other hand, a r duction in the full
employment surplus must reflect either a
discretionary increase in expenditures or a
lowering of tax rates. Either of these
a tions does tend directly to increase aggregat demand. 1 5
The fuU-employmcn t hudg t surplus is a superior instrnmc nt for analyzin r th impact
of fis ·al adion 011 aggrcgat , d ' rnand .
Th ' mov ·mcnt toward surplu s in th , r •alizcd IPA budg t position from 1961 to 1966
reflects primarily the impact on the budget
of rising levels of economic activity. The
movement over the period of the full-employment surplus toward smaller surpluses reflects,
on the other hand, the discretionary changes
that occurred in the budget program. Chief
among these discretionary changes were major
reductions in personal and corporate income
tax rates, as well as lesser reductions in excise
tax s, and a major increase in xpcnditurc
programs du e primarily to rrcater outlays for
the war in Vietnam. Thes F d ral actions reduced the size of the full-employm nt surplus
and had strong expansionary effects on economic activity, thus fostering vigorous income
growth which, in turn, led to larger realized
budget surpluses.
14
Robert Solomon, "The Full Employment Budget Surplus as on Analytical Concept," American Statistical
Association, Proceedings of the Business and Economics
Section, l 962, p. 11 0.
10
15
Ibid., p . 111 .
A Look at Some
Measures of Inflation
By Sheldon W. Sta/ii
which has b' n, and onI tinues to be,is a suterm
hject to a vari
of interpreFLATIO
ty
tations. Even a casual observer of th current
economic advance since it got underway arly
in 1961 would have seen or heard numerous
references made to one or another kind of inflation. A considerable segment of the literature devoted to an appraisal of the economic
outlook stresses the danger of growing "costpush" jnflation as a consequence of diminished
produ -tivity gains combined with aggressive
wag' d ' mands. Coming at a time when th'
forward pace of the conomy has slowed perceptibly, this is in contrast to "demand-pull"
inflationary pressures g nerated when the level
of aggregate demand exceeds the real output
capabilities of the economy. However, in both
instances the causative dimensions of inflation, rather than inflation itself, have been described. Inflation is the result of demand
and/or cost pressures which force the gen ral
lev 1 of prices to ris . It is inflation in this
latt r sens -pri
inflation-that i the focal
point of concern in this article.
To be sure, while a rise in the general level
of prices is necessary to define the existence
of inflation, it is not necessarily a sufficient
condition to identify or label inflation.
ot
Monthly Review
•
March -April 1967
even th pervasivcn 'SS of price incr ases
should, at all tim s, warrant conce1n that very
upward movem nt in the price level is evidence of inflation. For example, it is not uncommon for widespread price increases to
occur during the recovery phase of a business
cycle. However, the mere reversal of earlier
cyclical price declines is not generally thought
of as a manifestation of inflation. The current
economic advance witnessed substantial increases in th pri ·cs of certain nonfcrro 1s
metals, livestock, hid s, and skins. In ca ·h of
th s , instances, th incr as s wer of sufficient magnitude to yi ld a ris in the g neral
level of prices, yet the forces which triggered
these price increases stemmed from limitations on supply or strong export demand which
frequently were unrelated to cyclical factors
or to the prevailing level of economic activity.
Despite these precautionary remarks regarding judgments on the pres nee or abs nee of
inflation, th re is some basis for con rn over
th problem of inflation. Th r overy phase
of this e pansion is far behind and the current
economic advance has entered its seventh year.
Hesource utilization rates ar at relatively high
levels and the general rise in p1ices which occurred in 1966 cannot be dismissed simply as
11
A Look at Some
Chart 1
MAJOR MEASURES OF PRICE CHANGE
110
100
Wholuot1 Prlctl
(11&7 ~&9•100 )
90
'62
I
I
,I I
'63
I
I
I
'64
I
I
I
I
'60
I
j
I
I
'66
I
I
I
90
'67
SOURCE: U . S. Department of Labor, Bureau of Labor Statistics; and U . S. Department of Commerce .
an aberration. This con rn was expressed in
th 1967 Economic Report of the Presid ent l
whi h str s d th importanc of r storing
pric tability through su ·h means as prudent
fiscal and monetary policies, by gov rnmental
action to relieve key pressure points on prices,
and by responsible action on the part of both
business and labor in arriving at wage and
price decisions.
The courses of action noted above are an
integral part of what may be termed economic
policy. Such policy-private or public-depends for its success upon the quality, comprehensiveness, and timeliness of the data used
in its formulation. In attemping to deal with
inflation, perhaps no series of data are of
greater importance than the indexes used to
measure price changes and price trends. Probably the three major indexes used for this purpose are the Consumer Price Index ( CPI ) , the
Wholesale Price Index ( WPI), and the Implicit Price Index ( IPI )-also known as the
Gross National Product Deflator.
Chart 1 traces the course of these indexes
from 1958 through 1966. It can be seen that
the evidence of inflation-at least from 1958
through 1964- is far from uniform, whil developments during 1965 and 1966 still leave a
number of questions regarding inflation un1
Economic Report of the President (Washington : U. S.
Government Printing Office, l 967) .
12
resolved. The behavior of the WPI during the
1958-64 period would provide very little corroboration for the charge of inflation; however,
both the CPI and IPI were marked by persistent rises throughout those 7 years. Thus,
the relevant evidence of inflation for this
period would depend on the particular index
chosen-ev n if one ignored the matt r of
what rate of annual pric increase constituted
inflation.
Table 1 quantifies the index changes shown
in Chart 1 and, additionally, separates the
1958-66 period into two subp riods. During
l 958-64, th WPI ad van d only .l p r c nt,
and th incl x a -tually r · rd d d lin s in
1961 and 1963. In ·ontrast, th
Pf and lPI
show d aggr g t incr ases of 7.3 p r
and 8.9 p r
nt, r sp tiv ly. Th av rag
annual increase in the CPI was 1.2 p r c nt,
while the IPI rose at an average rate of 1.4
per cent. For the period 1964-66, however,
all three indexes not only moved in the same
direction, but the WPI outpaced both the CPI
and the IPL The aggregate gain in wholesale
prices was 5.3 per cent, versus 4.6 per cent
and 4.9 per cent, respectively, for the other
two indexes. During this same period, the annual rate of increase in consumer pri s
Table
MAJOR PRICE INDEX CHANGES,
1958-66
Consumer Price Index
(All Items )
Year-to1957-59=
Year
JOO
Change
(Per Cent)
1958 ..........
1959 ..........
1960 ..........
196 1..........
1962 ..........
1963 ..........
1964..........
1965 ..........
1966 ..........
100.7
101.5
103 .1
104.2
105.4
106 .7
108 .1
109.9
113 .1
Percentage Change :
1958-66 .... 12 ,3,:,
1958-64.... 7.3
1964-66 .... 4.6
Wholesale Price Index
! A ll Commodities)
Year-toYear
1957-59=
JOO
Change
(Per Cent)
2.9
100.4
100.6
100.7
100.3
100.6
100.3
100.5
102.5
105 .8 p
1.5t
1.2t
2.3t
5.4,:,
0 .1
5.3
0 .8
1.6
1.1
1.2
1.2
1.3
1.7
0 .2
0.1
--0.4
0 .3
- 0.3
0 .2
2.0
3.2
0 .7t
t
2.6t
Implicit Price Index
( For Total GNP )
Year-toYear
Change
1958=100
! Per Centl
100.0
101.6
103.3
104.6
105 .8
107 .2
108 .9
110.9
114 .2
14 .2•:•
8.9
4 .9
p Preliminary.
,:,components may not add to total due to rounding.
tAverage annual rate.
t Less than .5 per cent .
SOURCE: U. S. Department of Labor, Bureau of Labor Statistics; and U. S. Department of Commerce .
i:6
1.7
1.3
1.1
1.3
1.6
1.8
3.0
1.7f
1.4
2.4t
Measures of Inflation
doubled and that of the IPI increased by about
two thirds.
In face of the nearly parallel over-all performance by the three major price indexes in
1965 and 1966, it might seem moot to consider
the question of whether the United States recently has be n subjected to pric inflation.
However, the matter of which index best
measures inflation still would remain unresolved, even if there wer general agreement
on the notion that upward movements in all
three major indexes are indicative of inflation.
Public or privat
conomic policy decisions
made during th p riod 1958-64, for xample,
might vary d 'I nding upon wh thcr the
m 'as nr' us ,d lo gaug' pri · ·hang 's was th
WP! ( whi ·h show ,d no tr nd ) or ith r the
CPI or th IPI ( both of which xhibited p rsistent annual increases averaging from 1 to
1.5 per cent, respectively) . Similarly, policy
actions or prescriptions during 1965 and 1966
also might differ if one attached greater
significance to the dramatic advance in the
level of wholesale prices following many years
of no change, rather than to the acceleration
in the rate of price advance which was evidenced in both the CPI and IPL In this important matt r of formulating policy to cope
with inflation, th key role of th major price
ind x s should b evid nt. on thel ss, the appropriat interpretation of the signals given
by them must rest on an understanding of
precisely what is, or is not, being measured
by each of the indexes, as well as on the collateral issue of the usefulness or validity of
the various measures of price change in attempting to gauge the incidence of inflation.
In the followin g analysis, the three major
price indexes will be examined more closely,
in order to better appraise them as measures
of inflation.
1
THE CONSUMER PRICE INDEX
The Consumer Price Index or, as it is officially called, the Consumer Price Index for
Monthly Review
•
March-April 1967
Chart 2
CONSUMER PRICES
ln du
lndo
130
130 ~ ~ -
110
100
100
90
,
,L•....J,..i..1ui.J.....L.Jw..L
1958
'59
'60
I
,
'61
I
1
1 , 1
'82
1
1 ,
'63
I
1
1
1
'94
1
1
'815
·ee
90
·e1
SOU RCE : U . S. Deportment of Labor, Bureau of Labor Statistics.
Urban Wage Earners and Clerical Workers,
is a statistical measur of changes in pric s of
goods and servi s purchas d by urban wage
earners and clerical workers, including families and, since the January 1964 revision,
single persons living alone. The coverage of
the index, according to the Bureau of Labor
Statistics ( BLS), includes:
... prices of everything peop1e buy for living
-food, clothing, automobiles, homes, housefumishings, household supplies, fuel, drugs,
and recreational goods; fees to doctors, lawy rs, beauty shops; rent, repair costs, transportation far s, public utility rates, etc. It
deals with pric s actually charged to consumers, including sales and excise taxes. It
also includes r al estat taxes on owned
homes, but it does not include income or personal property taxes. 2
To be sure, the above list is not all-inclusive,
as the "market basket" used for pricing purposes since January 1964 contains nearly 400
items. Nonetheless, it does help to give a reasonably good idea of the wide range of goods
and services which are included in the calculation of th over-all index. Chart 2 shows the
performance of the ov r-all CPI and major
2
U. S. Department of Labor, Bureau of Labor Statistics,
( Revised January 1964),
(Washington : U. S. Government Printing Office, September l 964) , p. l .
The Consumer Price Index
13
A Look at Some
groupings ( relative weights shown in parentheses) during the period 1958-66.
The CPI probably is the most familiar of
the three major price indexes discussed in
this article. Its lineage may be traced to
World ·w ar I, when it was referred to as the
Cost-of-Living Index, a term which still is
frequently, although erroneously, applied to
the CPI. Initially formulated as an aid in
wage negotiations, the index has undergone
a series of revisions, the most recent occurring
in 1964, as noted above. The revisions have
encompassed the goods and s rvice priced in
the index, the list of survey ·itics used, as well
as the weights assigned lo the various index
(·ompon( nls. Ernphasis lws shifted over lime,
as a basis for assigning weights, from the ( x-
penditures of wag -earner families to the
outlays of middle-income wage and salary
workers.
As indicated earlier, the CPI was initially
used to aid in wage negotiations. It still is
used extensively in collective bargaining
negotiations-especially during periods of rising prices. Currently, frequent references are
made by labor to the recent advances in the
CPI as justification for seeking wage increases
in 1967 in cxc ss of the 3.2 per cent rate sugg sted earlier by the wage-price guid posts.
Automatic wage adjustments, based on sp cified percentage changes in the CPI, have been
incorporated into many labor-management
contracts-so-called cost-of-living escalator
clauses. Other long-term contracts, such as
leases, utilize the rent component of the CPI
as part of an escalator clause for adjustment
purposes. Other uses of the index include
measuring changes in the pur hasing power of
the dollar in ord r to adjust th l vel of pensions, welfare payments, royalti s, etc. The
CPI is used to conv rt money wage into
"real" wages to gauge the degree to which
labor is sharing in improv d living levels.
Many of the components of the CPI are used
in the construction of the IPL Additionally,
14
the CPI probably is used by the public more
than either the WPI or the IPI as a measure
of inflation or deflation in the economy.
The CPI, like all indexes, measures price
changes from a designated base reference
period. Since 1962, the base period has been
1957-59 equals 100. Thus, an index level of
113 means that pric shave ris n by 13 p r cent
from the base p riod. Conversely, an ind x
level of less than 100 would mean that prices
have fallen. It is important to remember, however, that what is b ing measured is the change
in the amount of money required as prices
change- with all other things, such as in omc,
being held co11sl,1nl - lo b11y a fixed combination of goods and services ( the market
basket). Th ' market basket is regard ·d as
being representative of all goods and services
purchased by consumers in the particular period used to derive both index weights and
pricing samples. The fact that the market
basket of the base period is held fixed, until
the next weight revision, means that the CPI
maintains the pattern of expenditures of the
base period in measuring subsequent price
changes. This sort of index makes no allowanc b tween weight revisions for the adjustment or alteration of spending patterns by
·onsumcrs so as to maximize the purchasin'
power of their incomes as prices change.
However, in a tru cost-of-living index, the
level of living, welfare, or utility would be
held constant, while the consumer would be
permitted to alter his pattern of expenditures
( the market basket would no longer be fixed)
as prices changed. For this reason, despite
the fact that the CPI measures changes in
many of the key items which enter the cost
of living, it is not a cost-of-living ind x per se.
From the standpoint of practicality, it is
not reasonable to xpect a monthly index, such
as the CPI, to s rv as a measure of chang s
in the cost of living. However, in order to
make the index more representative of shifting patterns of consumer expenditures, the
Measures of Inflation
Table 2
RELATIVE IMPORTANCE OF
CONSUMER PRICE INDEX MAJOR
GROUPS, SELECTED PERIODS OF
EXPENDITURES STUDIES
December
1917 - 19
All Item s .... ------- 100.0
Food
40 .7
···Housing ....... ·-··· - 26.6
A pparel - --· --------17 .7
Transportation
3. 1
M ed ica l care .......
4 .7
Personal care
1.0
Reading and
recreation ... ···3.7
Other goods
and services
2.5
Tobi
11 - 1 1n
t eria ls Submitted to the
of th
Joint Economic
Sta tes (Wo~h 1nqt on, U.
19 l ), J) . 18
SOURC
1952
-1934-36
( lnper cent )
December
1963
100.0
33.5
32.0
10.6
8.3
3.9
2.0
100.0
29 .6
32.5
9 .2
11.3
5. 1
2.0
100.0
22 .4
33.2
10.6
13.9
5. 7
2 .8
5.9
5.3
5. 9
3.8
5.0
5.4
"Inflation and Price Indexes," Ma Subcommittee on Economic Sta t ist ics
Committee, Congress of th
United
. Govc-rnm nt Pr1n l1ng Offic ) , July
THE WHOLESALE PRICE INDEX
The purpose of th WPI is to measure average pri ' chan g s in omrnoditics sold in primary markets of th e lJ nitccl State's. The base
rdc1Tt1C(' period , as in the t'asc of tlw CPI , is
19,57-,59
JOO. The WPI , or ils w mpon c nt s,
is used for a variety of purpo. 'S, induding
c ·onomic for asting and th escala tion or
scaling down of long- t rm indush·ial purchase
and sales contracts, in much the same way as
the CPI is used in making cost-of-living adjustments. Again , as was true of the CPI, components of the vVPI are used in estimating
the IPL
The BLS has compiled an index of wholesale pri cs dating back to 1890. It should be
noted that th e Lenn "wholesale," as us cl in th
titl e of ti c index, docs not refer to prices r ,_
ccivcd by jobh rs, whol salers, or distributors,
but simply to sales in quantities. Th cov rage of th e WPI does not include price movements of retail transactions or transactions for
services ( except gas and electricity), construction, real estate, transportation, or securities. Similarly, the prices of products entering
into international trade are excluded from the
WPI. Chart 3 shows the performan ce of the
over-all WPI and th e major commodity gro ups
( relative weights shown in parcnth scs) during th p eriod 1958-66.
=
BLS utilizes tlw results of co nsumer xp nditurcs studies to p riodically chan ge the r lative impo1tance of the major components of
the CPI. Such changes are shown in Table 2.
At such times, changes in the index would, of
course, more closely reflect changes in the
cost of living. The lengthy intervals between
such revisions, however, mean that the farther
away one moves from th e revision date, the
less wiJl price chan ges, as measured by the
CP I, rcflc -tactual chan ges in the cost of liv ing.
The data in Tabl , 2 larg ly r fleet th - infl u n of rising in ·orne 1 •vels over time on
spending patterns. The dramatic decline in
th e proportion of total income expended on
food, and the relative stability of spending on
clothing and housing, stands in sharp contrast with the marked rise in the proportions
of what may b e termed discretionary spending on the other groups shown in Table 2.
In addition , each of the gro ups has been
marked by changes, in varying degrees, in the
kinds of goods and services priced by the ind 'X, with the addition of new produ ts and/or
the replac m nt of older on s. The current
marke t basket undoubtedly repr scnts a higher
level of living than formerly. In the light
of these developmen ts, it becomes quite diffiMonth ly Review
cult to assess the over-all inflationary implica tions of increases in the CPI over time. It
may be worth reflecting fmth er on the suggestion advanced in 1961 by the National Bureau of Economic Research Price Statistics
Review Committee that " ... it is quite possible that the cost of maintaining a fixed standard of living has fallen despite th e fact that
the price of a fixed market basket has risen.":i
•
March -April 1967
3 U. S., Congress, Joint Economic Committee, Government Price Statistics, Hearings . . . January 24, 1961,
87th Cong. , l st Sess., 196 l, p. 51.
15
A Look at Some
Chart 3
WHOLESALE PRICES
lndo
120
SOURCE: U . S. Department of Labor, Bureau of Labor Statistics.
According to th BL , th pric s us d in th
n tructi n of th WPI:
. .. are thos whi h appl y a· 1 arly as posibl to th first signifi ant comm r ial transaction in th Unit d Stat s. Lat r transactions for the same item at other stages in
the distribution cycle are not included. However, as raw materials are transformed into
semifinished and finished goods, the resulting
products are represented according to their
importance in primary markets .4
The price quotations used in compiling the
WPI are obtained from respondents by mail.
It is important to not that the prices rec ived
by the BLS are from the sellers of goods, not
th buyers. Although th sellers ar r qu st d
to provide a tual pric s charged to their customers, including all discounts from list pric s,
the response has not been uniform and the
BLS, at times, receives only list prices. At
times, when list prices and transaction prices
tend to diverge, the WPI fails to reflect the
actual price changes which occur. To the extent that this kind of bias is symmetrical in
periods of both rising and falling price levels,
it would tend to cancel out over time. However, at critical phases of a business cycle, the
short-term s nsitivity of th WPI to actual
price changes may b less than d sir d.
4
Wholesale Prices and Price Indexes, 1963, U. S. Department of Labor, Bureau of Labor Statistics, Bulletin
No. 1513 (Washington: U. S. Government Printing Office , June 1966 ), p. 9 .
16
The WPI has gone through several comprehensive revisions since 1890. The weights
used in the index are revi d at approximately 5-year intervals, as data from industrial c nsuses become availabl . Cov rage of
th ind x ha grown from less than 200 commodities in 1890 to nearly 2,200 in 1960. Table
3 illustrat s this xt nded ov rag and also
shows v ry cl arly th mark d changes in the
relative importan e of the major commodity
groups ov r a 70-year p riod. The relativ
w ight chang shown refl ct the transition
of th
conomy from a largely rural and
agrarian
i ty into a mu h mor urbc. n , nd
hi ghl y i1 d11stria]izccl so i ty.
The grow ing importance of 11 du strial pri ' s
in th WPI probably has s ·rvc l to mak th
index mor stabl , since industrial pric s t nd
to fluctuat less widely than those of either
farm products or process d foods.
onetheless, the element of duplication in the WPI,
owing to the inclusion of products at different
stages of production, can result in a dramatic
impact on the entire index, when the price of
a key item changes. A notable example of
this is the decline in the supply of liv stock in
1965, which triggered off substantial increases
in the pri s of farm produ t , pro ss d foods,
and hid s and skins. Y t, this sam ] m nt
of duplication has its m rits, sine pric iner as s can be tra d throu gh succes ive
stages of production-from th raw material
to the finished product. By providing evidence of the pervasiveness of price increases
at differing points in the production process,
Table 3
RELATIVE IMPORTANCE OF
COMMODITIES IN THE WHOLESALE
PRICE INDEX AND NUMBER OF
COMMODITIES AT SELECTED DATES
1890
1918
-- -(In
All commodities .......... 100.00 100 .00
Farm products .............. 29 .04 27 . l l
Processed foods ............ 25.54 25 .80
Nonfarm, nonfood
( industrial) .............. 45.42 47 .09
Number o f commodities
199
534
1929
1947
1960
per cent) - - - 100.00 l 00 .00 100.00
19.01
14 .59 10.59
18.36
15 .87
14.04
62 .63
784
69.54
1,819
75.37
2,161
SOURCE : U . S. Department of Labor, Bureau of Labor Statistics.
Measures of Infla t ion
the behavior of the components of the WPI
may be of help in assessing more correctly
the movements in the over-all index. Because
the WPI tends to reflect price pressures at the
earliest stages of the production-distribution
process, it may well be the best indicator of
future price trends in the over-all economy.
THE IMPLICIT PRICE INDEX
The Implicit Price Index is the newest, and
probably the least familiar, of the three major
indexes discussed in this article. It was first
published in 1951 and is compiled and published quarterly by the Offic of Business Economics ( OBE) of the U. S. Department of
ommcr c, nsing th r f 'r •n · bas 1958 =
100. lt is the most comprehensive of th thre
major price index s, in that it attempts to
measure the general price level of all final
goods and services produced by the economy
during a given period. However, the IPI is
not derived by means of direct price collection, as is the case with the CPI and the WPI.
That is, in its efforts to determine the level of
real ( constant dollar) GNP, the OBE generates the IPI as a byproduct. It is derived by
taking the ratio between current dollar gross
national product (GNP) and constant dollar
GNP and multiplying it by 100.
It should be pointed out that current dollar
GNP may increase, either as a consequence
of an increase in the physical volume of goods
and services produced or merely through an
increase in prices with no change in physical
production. The determination of the real
growth in output involves removing the effect
of price increases by use of deflation procedures. The OBE deflation process entails
dividing the current dollar value of each component of GNP by some appropriate price index and summing the deflated components to
arrive at the level of real GNP. When the deflated GNP data are divided into the current
dollar GNP figure, the resulting ratio represents an implied average price relationship.
Monthly Review
•
March -April 1967
Table 4
RELATIVE IMPORTANCE OF PRICE
DE FLATORS FOR TOTA L GROSS
NATIONAL PRODUCT IN THE
IMPLICIT PR ICE INDEX
Per Cent Importance in Terms of Base Year ( 1958) Weights of:
BLS
USDA
Implicit
Price
Consumer Wholesale Agricultural
Deflater
Prices
Prices
Prices
J0o.0
~
~
6.8
Other
Prices•:•
Implicit Earnings
Prices lndexest
13.5 73"12.5
•:•other prices refer to price data collected by Government
agencies other than the BLS and USDA and by private organizations.
tlncludes implici t earnings indexes for Government compensation .
SOURCE : U. S. Deportment of Commerce, Office of Business
Economics .
Both the CPI and the WPI are fixed w ight
index s in whi h the xpenditure weights and
the contents of the resp ctive market baskets
being priced are fixed between revision dates.
The theoretical design of these indexes is such
that price changes of the same, or essentially
similar, items can be measured directly over
time. The IPI, on the other hand, is not a
fixed weight index. The weights used in estimating the IPI are the proportions in which
the different components of GNP are entered
in the national income accounts from year to
year. Any change in the yearly pattern of
spending on the components of GNP automatically will result in a change in weights.
Thus, because the IPI cannot directly measure
price changes when the composition of output changes, the quality of the index rests
heavily upon the choice or appropriateness of
the various price deflators employed in estimating real GNP.
Table 4 shows the relative importance of
the six different classes of price and wage
data used to deflate total GNP. The components of the CPI and the WPI account for
nearly 60 per cent of all GNP deflators used
in the IPL Thus, much of the accuracy of the
IPI rests upon two measures of price change
which are, themselves, subject to qualifications
in their use. With the added exception of
17
A Look at Some Measures of Inflation
agricultural prices, which are collected by the
U. S. Department of Agriculture (USDA),
the remaining deflators in Table 4 are supplied either by Government agencies other
than the BLS and the USDA, by private organizations, or are arrived at indirectly. In this
connection, one of the major criticisms of the
IPI involves th us of price deflators in the
private s ctor which are not strictly comparable-and, therefore, unsuitable-to the
dollar totals to which they are applied. The
failure to allow for increases in output per
man-hour in deflating the constru tion s ctor
and Govcrnm 'nt s rviccs also has h en cit cl
hy many observers as a prime factor which
introd11 ·cs a significant clement of distortion
into th lPI, and ther hy ovcrstat 'S th magnitud of price inflation and understates th increase in real G P. It can be seen, then, that
the method of computing the IPI compounds
the probabilities of error or bias which are
an inherent part of the construction of any
price index.
18
A FINAL NOTE
Price statistics are an important component
of our total body of economic knowledge. In
conjunction with other kinds of economic intelligence, they play a key role, not only in
the evaluation of th performanc of the
economy but, additionally, in the formulation
of public and private economic policy. The
three price indexes discussed in this article
frequently are relied on as measures of inflation. Each of them can help shed some
add d light on that complex phenom non.
Their usefulness in this capa ity i dir tly r lal<'cl lo a hC'llN 11nd<'rstancling of what they
measure, as well as a reco 1 11ition of th •i r
Jimitalions. The growing hurdcn of publi
and privat policy formulation b ing plac d
upon m asures of price change indicates the
increasing need for more and better price
statistics, and a correspondingly greater effort at understanding and interpreting their
meaning.
@FedFRASER