The measurement of price inflation has always been a major matter of interest for academics and policy makers. The dangers of using inappropriate indexes to support the design of macroeconomic policies have been forcefully demonstrated by Keynes (1925), who showed that Winston Churchill underestimated the cost of restoring the Gold Standard because he incorrectly used a wholesales index numbers to predict the required price deflation. The US government set up two external independent commissions (the Stigler Commission, 1961, and the Boskin Commission, 1996, endorsed by the Bureau of Labour Statistics - BLS) to assess the accuracy of the measures tracking the change in the level of prices. Their conclusions were not encouraging: quite apart from the technical shortcomings of the standard chained Laspeyres methodology, the commission calculated that before 1996 CPIs have structurally overstated inflation by 1.3 percentage points on average. The Boskin Commission strongly recommended the BLS to pursue measures of inﬂation which more accurately capture changes in the cost of living.
The present paper proposes an algorithm for a new index that is able to:
- reduce the structural lagging behaviour with respect to the business cycle of more traditional inflation measures;
- overcome the lack of both a forward- and a backward-looking component in a dynamic approach to the measurement of inflation;
- disentangle the contribution of durable and nondurable goods;
- be easily implementable;
- be more sensitive to the variability of the business cycle.
Thus, through the consideration of both a forward and a backward looking component, the new index provides a better analytical description of consumption dynamics, corrects the inflationary bias of CPI and proves more effective in tracking the business cycle. It is therefore a more appropriate indicator to support the design of policy measures.