Greenspan Says Price Stability May Be Hard to Gauge

Federal Reserve Board Chairman Alan Greenspan said Saturday that the Fed is likely to face a difficult task in trying to decide whether the economy finally has reached price stability--its primary goal for the last 25 years.

In a speech before the American Economic Assn. in Chicago, Greenspan said the flaws in the consumer price index, which apparently overstates the rate of inflation, could become more misleading as the inflation rate continues to decline.

“For most purposes, biases of a few tenths [of a percentage point] in annual inflation rates do not matter when inflation is high,” Greenspan said. But, he added, “they do matter when, as now, inflation has become so low. . . .”

He said policymakers now need to consider “at what point effective price stability has been reached” and to guard against squeezing the economy too hard lest it set off a round of deflation.

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The issue of possible flaws in the consumer price index arose a year and a half ago when a commission headed by former presidential economist Michael J. Boskin found that the statistic overstates inflation by about 1.1 percentage points a year.

Since then, other economists, including those at the Fed, have disclosed similar findings. Neither the administration nor Congress has acted to alter the index, however, for fear of sparking a political controversy.

Many contracts and other transactions in the economy--from Social Security benefits to cost-of-living increases in wages--are linked to the government’s price indexes. Reducing the size of those increases could anger some voters.

Greenspan’s point on Saturday was that while a 1-percentage-point error might not make much of a difference in setting policy when inflation is at a rate of 5% a year, it could mean a lot with a rate of only 1% or 2%.

Inflation currently is running at just below 2% a year.

Greenspan’s remarks, a text of which was made public by his office here, were primarily an academic discussion and do not appear to hint at any change in the current monetary policy set by the Federal Reserve Board.

Despite some fears that inflation pressures may be intensifying, the Fed has kept interest rates steady since March, partly because of expectations that financial turmoil in Asia would slow the U.S. economy.

Most analysts now believe that the Fed will continue to keep interest-rate levels intact at its next meeting, in February. Inflation has continued to be moderate, with little sign of a revival in wage or price pressures.

Greenspan stopped well short on Saturday of predicting either a resurgence of inflation or a move toward deflation, which he defined as a generalized and persistent decline in prices.

Indeed, he pointed out that many of the price declines that have been recorded recently have stemmed from technological innovations that have made it less expensive to produce goods or services. Other declines have resulted from dips in stock prices, he said.

But Greenspan warned that policymakers must be on guard to make sure they take account of the flaws in the government’s price statistics when they set money and credit policies, and he urged economists to study the issue more fully.