| An inflation targeting monetary policy attempts to maintain inflation within a small range or at an explicit target, thus the vehicle used to measure inflation in this type regime needs to be accurate for policymakers to effectively control inflation. The purpose of this study was to test the accuracy of the current United States inflation estimate, which is based on the Consumer Price Index (CPI), versus a new model for inflation estimation, the Elliott True Inflation Index (ETII). A quantitative statistical analysis was applied to examine if changes in inflation measured by the ETII differ from inflation measured by the CPI. The ETII couples external inflation estimates with the actual percentage of consumer spending from GDP measures and provides a new measurement vehicle for measuring inflation, thus eliminating much of the seasonal, substitution, and other arbitrary bias inherent in the construct of the CPI. The results of this study show that current inflation estimates, measured by the CPI, are understated compared to United States consumer consumption patterns; therefore, utilizing the ETII in establishing policy could have wide-ranging implications. Since inflation forecasts are at the root of so many public policy issues, a more accurate measurement vehicle for inflation could have acceptance globally and give more credibility to governments and central banks, which is crucial to the longevity of these democratic institutions. The ETII could be used as the measurement vehicle that an inflation-targeting monetary regime is based upon, favorably affecting people's real purchasing power and welfare. |
