On the losses generated by the inflation mis-measurement

Abstract

The article examines problems related to the measurement of Russian inflation that lead to distorted perception of economic reality which economic agents have. The authors discuss recent changes in methods for constructing the Russian consumer price index (CPI) and the effect this will have on the economic policy. The change in the information base upon which the weights are based, has resulted in the fact that (all other things being equal) the CPI, calculated according to the new methodology, shows a somewhat higher rate of inflation. This creates a more pessimistic view of the situation in the economy and provokes a more stringent monetary policy. The paper discusses approaches to the analysis of tendencies in the prices dynamics on the example the accelerating inflation episode of the end of 2014 - early 2015. It is shown that common incorrect methods for analysis of short-term trends lead to conclusions about the duration of the episode and the dating of the respective turning points that are known to be wrong. The author review those features of the CPI constructing technique, which affect the accuracy of inflation measurement amid economic crises. An incomplete accounting of household expenditures on housing is shown to result in an overestimation of the CPI growth rate for the cost of living in the initial phase of the crisis and in their underestimation at the stage of post-crisis recovery. All these distortions can the cause of sub-optimal decisions and influence the operation of economy. The paper discusses the nature of this influence and associated costs.