Inflation Targeting and Revisions to Inflation Data: A Case Study with PCE Inflation

Introduction Central banks around the world have come to recognize the importance of maintaining low and stable inflation. One widely employed tool for helping to do so is known as inflation targeting, whereby a central bank sets a numeric goal for inflation. Once this target is publicly stated, the bank can be held accountable for its actions in regard to meeting, or not meeting, this target. Countries that have adopted such a tool have generally had a favorable experience, and there is evidence that inflation targeting is correlated with increased stability in output growth, lower inflation, and more stable inflation expectations (Dotsey, 2006). While at a broad level the idea of inflation targeting can appear to be a straightforward concept, carrying it out in practice requires a central bank to make many subtle decisions. For example, a central bank must decide how to specify the target: one value or a range of acceptable values. The bank must also decide over what period of time it should measure inflation. This could mean comparing the target to an average of the past three months or perhaps an average over the past year. Yet another decision must be made as to which measure of inflation will be used. Fundamentally, measuring inflation means measuring the growth of a price level, and the variety of choices stem from the variety of different price indices used to measure the nation's general price level.