Assume that the actual rate of inflation is a little above the target and that new statistical procedures are introduced into the index which lower the reported inflation rate by x percent, where x is a small number. Two alternative policy responses could occur. First, the central bank finds that reported inflation now meets its target and relaxes its efforts to drive inflation lower. Alternatively, it could reduce the target inflation rate by x percent. Since nothing in the real economy has changed by virtue of the statistical correction, the former response represents an implicit judgment that (unbeknownst to policy makers) the old target was in fact too high and was unduly restrictive for the economy. But mere changes in measurement can hardly be taken as evidence regarding the appropriateness of the original inflation targets. In the absence of any reason to believe that the old targets were inappropriate relative to the way inflation was reported at the time, the logical reaction to a change in inflation stemming from revised measurement is to alter the target correspondingly.

Because the CPI is a focal point for many transactions, a statistically induced change in the index may, during some transition period, have important real effects—for example, on wage bargains and therefore on actual inflation. The central bank would have to take those changes into account in formulating its operating policy; but it would seem logical to adjust the target itself to reflect the statistical change.

Since the CPI is used for indexing public transfer payments, the income tax code, and private contracts, even those methodological changes that produce relatively small differences in the annual rate of inflation can have significant consequences for government budgets and the welfare of individuals as their effects cumulate over time. When used as an output deflator, even small changes in the GDP price index can cumulate into larger differences in reported output gains and have at least modest effects on the assessment of real economic performance. But as an inflation indicator for the central bank and other policy makers, small differences in reported inflation rates resulting from statistical changes in the CPI or design differences between different price indexes are probably not very significant. Thus, the difference between the use of a Laspeyres or a superlative index (at the upper level) represents a choice of at least some importance for most uses of the CPI, but not for its use by the central bank as an inflation indicator. Even if such small differences should matter, they will likely have been incorporated into the decision making of these sophisticated users of price indexes.

In addition to the use of an inflation index as a measure of their policy target, central banks and other policy makers use various derivative measures of current inflation as devices to help them to filter out the substantial “noise” in the month-to-month changes in inflation so as to detect significant changes in its underlying level. Many different kinds of measures can be used, such as the “core” rate of inflation (excluding such volatile items as food and energy); a “stripped” rate of inflation, removing (for example) the 10 percent of items with

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