WASHINGTON — In a move that could minimize the turbulent impact monthly inflation news has on Wall Street, Bush administration economists are considering changing the way the Consumer Price Index is calculated.
The Bureau of Labor Statistics, which compiles the CPI for the Labor Department, is discussing whether to round the key inflation index to three decimal points instead of one, according to an internal federal working paper, which was reported in Monday’s Wall Street Journal.
Since the CPI is rounded to only one-tenth of a decimal point, the percentage change in inflation rates can be inaccurate, according to Patrick Jackman, an economist at the BLS.
“Roughly 25 percent of the time you can end up rounding improperly” when it is based on one decimal place, Jackman said, citing a BLS working paper titled “The Effects of Rounding on the Consumer Price Index” written by Elliot Williams.
“Reporting the CPI levels to three decimal places would reduce these discrepancies to under 0.5 percent,” Williams wrote in the paper. “I find that the BLS could reduce total CPI inflation error variance by 42 percent by simply reporting more digits in the CPI index, resulting in a significantly more accurate reflection of monthly inflation.”
Wall Street investors have sold off stocks in recent months following news that inflation was spreading in the economy. The retail sector has been hit heavily, as investors pulled out money amid fears that higher prices on consumer goods might dampen consumer spending and put pressure on the bottom line for retailers.
“What precipitated this [proposed change in the CPI calculation] was the way in which markets ended up reacting to the changes [in the inflation rate],” said Jackman. “The feeling here is we want to give them the best information we can so they can move as they see fit.”
Jackman said the BLS has not determined whether it will make the changes to the CPI, but he noted that if an affirmative decision is made, it will likely be introduced in the CPI’s January data, which will be released next February.
The Federal Reserve Board also watches indicators such as the CPI to gauge whether further interest rate increases are needed. The Fed has raised interest rates to 5.25 percent from 1 percent since June 2004 — a total of 17 increases — and there has been widespread concern that the increases will clamp down too much on economic growth.