MacroScope

Watch price of booze for inflation tips, says Cleveland Fed

May 19, 2010

What do the price of infants’ clothing and alcohol have in common? They are “sticky prices” that rarely change.

Federal Reserve researchers Michael Bryan and Brent Meyer say these sticky prices may be a better indicator for where inflation is heading.

“While a sticky price may not be as responsive to economic conditions as a flexible price, it may do a better job of incorporating inflation expectations. Since price setters understand that it will be costly to change prices, they will want their price decisions to account for inflation over the periods between their infrequent price changes,” the researchers wrote in a study published on the Cleveland Fed’s website.

What their sticky price index showed? While the recent trend in the core flexible consumer price index has risen recently, up 3.3 percent over the 12 months ending in March, the trend in the core sticky-price CPI continues to decline.

“Subdued for some time” sums up the price trends nicely,” they wrote.

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