The Political Economy of Inflation Measurement

Inflation is a commonsensical and ubiquitous concept. It is used to index pension entitlements, wage increases and tax brackets, it is hardwired into monetary policy, and it is used to calculate real growth figures. How we clacualte inflation has significant distributional consequences. 

But inflation measurement is dogged by a range of conceptual difficulties, revolving for example around the measurement of house price inflation, quality improvements or changes in living styles. And in spite of its technical character, inflation measurement has remained highly politicized: citizens routinely suspect that governments "game the numbers" - presenting inflation figures that are much lower than real price increases.

Because of these intractable difficulties and tensions, the formulas to calculate inflation have kept changing over the years, and they continue to differ across countries. There are international guidelines, but there is no globally agreed formula for how inflation should be measured. Most recently, the global financial crises has triggered a new round of soul searching by central bankers. This variation in how we measure a central property of our national economies directly raises the questions why we use the formulas that we do - and what the politics are that underlie them.

Focussing on the history of inflation measurement in the USA, the UK, Germany, France and the Netherlands in particular, this paper lays out how inflation measures that are used today are political both in their origins and in their consequences. It highlights the most important axes of distributional conflict built into inflation formulas, and it reveals the forces that have - invisibly - structured these formulas.