ECONOMY : Government to Launch New Inflation Indicator in ’96

The Labor Department plans to launch a new tool for measuring retail inflation in 1996 that may give a lower reading than the well-established consumer price index, a senior official said.

The department will release its July CPI today, and Wall Street economists expect it to show a 0.3% gain, the same as last month.

The new index will not seek to replace the CPI, said Paul Armknecht, assistant commissioner for consumer prices at the Bureau of Labor Statistics. But it will go some way toward addressing criticism that the CPI overstates inflation.

“We’re exploring putting out an alternative index using a different estimator,” he said this week.

In testimony to a House operations subcommittee this week, Federal Reserve Board Chairman Alan Greenspan urged the bureau in coming years to confront the problem of “systematic biases” that may exist in the consumer price index.

According to Armknecht, that is exactly what the department is doing. It experimented with the parallel index last year and in December published its findings that showed retail inflation about three-tenths of a percent short of the CPI reading.

“People who are concerned about monetary policy may think it’s a better indicator,” he said, adding that if the plan gets beyond the drawing board stage, it will be released in 1996. But he played down the impact it would have on data.

“Even using the different estimator, the difference (between the two inflation readings) isn’t going to be anywhere near the order of 1% or 2%,” he said.

There are several factors that may skew the consumer price index, all of which complicate the jobs of Fed policy-makers and Wall Street analysts who need to understand where inflation is headed to decide where interest rates should be.

Speaking after Greenspan on Capitol Hill on Wednesday, David Wyss, research director at DRI/McGraw Hill, suggested that U.S. inflation may actually be half the 3% rate it is currently considered to be if changes in productivity growth are factored in.

“Would the Federal Reserve be as eager to tighten if the consumer price index were rising only 1.5%?” he asked.

Armknecht listed several other factors that affect the CPI.

He noted that the index is measured from an anachronistic basket of goods that dates back to 1982-84. It has also been slow to incorporate prices of goods sold at discount outlets, even though such prices are usually lower than department stores’.

Furthermore, the index excludes new products until they become mainstream. By that time, a product--pocket calculators, for example--will have run the course of price declines a new item typically enjoys. It will join the index when its price has fallen about as far as it can go.

It is unlikely, however, that any revised reading on inflation would force the Fed to change its mind on the economy. Greenspan said he factors biases in inflation indicators into his calculations and looks at a host of other factors to chart monetary policy.

Armknecht noted that even if a parallel reading was at a lower overall level than the CPI, the two indexes would rise in lock step once inflationary pressures began showing up.

Until June, the data was showing no inflationary problem, but danger still lurks. “The CPI is not a leading indicator,” Armknecht said. “It’s usually a lagging indicator.”