Washington - In testimony before a joint session of Congress, Federal Reserve Chairman Janet Yellen unveiled a new preferred measurement of inflation, developed to further combat the tendency of prices to increase in the U.S. economy.
"Historically, as the Federal Reserve increases the supply of money needed to fund the U.S. Budget Deficit and stimulate the economy, we find that pressures are created in which the prices for goods, services and assets tend to go up. Back in the 70's, we used a simple measure of inflation called the CPI. This measure doesn't include assets like real estate and stocks, but goods and services which we can control and modify. But we found that the prices of some goods like food and energy were increasing faster than others, so we took those out, and came up with the Core CPI".
"Later we developed other measures such as the PCE, Personal Consumption Expenditures Index, also removing the effect of items which rose in price so fast that consumers could no longer afford them, and just stopped buying. This further reduced inflation. Various other measures such as PCEPI, and GPIIPD, were introduced, all somewhat successful in reducing the inflation problem", she explained.
"We now feel we have come up with a measure that will end once and for all the threat of rising prices. We refer to it as IPIRCPII, the "Increasing Price Item Removal from CPI Index". When we find a particular good or service used to calculate CPI goes up, we simply take it out of the basket of items used in the calculation. This should eliminate the inflation we have experienced for the foreseeable future", said Yellen.
Further testimony revealed that the new measure would have eliminated automatic increases in social security payments, and allowed the Fed to decrease interest rates below zero, allowing member banks to charge depositors interest to hold their money, among other benefits to the economy.
