“Fixing Inflation Policy Starts With Fixing Measurement”

The debate over how far to cut interest rates while inflation remains above target has pushed inflation measurement back to the center of monetary policy. What once seemed like a technical concern has become central to the policy debate, as policymakers, markets, and politicians argue over whether the data themselves justify easing-or whether easing is being justified by adjusting for known measurement lags.

That scrutiny has intensified amid heightened political pressure on the Federal Reserve, including public attacks on its leadership and ongoing scrutiny of its decisions, alongside inflation readings that have softened but remain above the Fed's 2 percent goal. With another FOMC meeting approaching, small differences in the data now carry meaningful market and political consequences, and disputes increasingly turn on how inflation is measured rather than what policymakers are trying to achieve.

Why This Moment Is Different

Longstanding weaknesses in U.S. inflation measurement have been widely acknowledged but rarely addressed. Inflation measurement has not remained static because economists believe it is optimal, but because, for long stretches, its imperfections did not materially constrain policy choices.

That condition no longer holds.

The debate over whether to cut interest rates while inflation remains above target has brought measurement questions back to the center of monetary policy, not because policy outcomes are obvious, but because the data guiding them are not. When policy decisions hinge on whether inflation is genuinely persistent or merely appears so because of known lags-particularly in housing-the quality of the data becomes decisive.

In that environment, policymakers face a narrowing set of options. Leaning on lagging indicators risks overtightening and policy error; discounting official measures risks undermining credibility. When the same data must be simultaneously trusted and mentally adjusted, inflation measurement itself becomes a source of instability rather than a neutral guide.

At the same time, the political constraint that long insulated legacy frameworks has weakened. Donald Trump has shown little reluctance to revisit institutional arrangements simply because they have existed for decades. That governing style-controversial in many contexts-creates an unusual opening for technical reform.

The Housing Lag Everyone Knows About

Housing illustrates the problem most clearly. Shelter accounts for roughly one-third of CPI and a materially smaller share of PCE, yet both rely heavily on owner's equivalent rent-a survey-based estimate of what homeowners believe their homes could rent for.

That approach was long defended because comprehensive, timely rental market data did not exist. That is no longer true.

Private-sector rental datasets now provide high-frequency information drawn from millions of listings, renewals, and transactions nationwide. These data consistently show that official shelter inflation responds with significant delay to changes in actual rental market conditions. In effect, measured housing inflation reflects where the market was, not where it is.

Regional Federal Reserve Banks have acknowledged this gap. The Cleveland Fed incorporates alternative rental indicators into real-time inflation models, while the San Francisco Fed has shown that the apparent persistence of shelter inflation largely reflects measurement lag rather than ongoing price pressure. These efforts do not replace official statistics; they exist precisely because the limitations are known.

Markets have internalized this reality. Private rent measures turned well before official shelter inflation followed, reinforcing restrictive policy long after housing markets had cooled. The divergence was most visible near policy turning points-precisely when accurate measurement matters most.

Why Working Around Bad Data Isn't Enough

Adjusting policy to compensate for known data lags may be understandable, but it exposes a deeper problem. When policymakers feel compelled to "correct" for measurement flaws in real time, the issue is no longer judgment. It is the measurement tool itself.

If inflation data are slow to reflect easing conditions on the way down, they were equally slow to capture pressures on the way up. The solution is not perpetual reinterpretation. It is better measurement.

Old Baskets, Conflicting Targets

Housing is only the most visible weakness. Consumption patterns now evolve far more quickly than they did when inflation methodologies were designed. While recent changes have modestly accelerated basket updates, official measures still struggle to capture rapid shifts in spending during periods of disruption.

At the same time, the Federal Reserve targets PCE inflation while Social Security and many private contracts rely on CPI. The persistent gap between the two-typically several tenths of a percentage point-may seem technical, but it complicates communication and weakens coherence near policy inflection points.

Transparency and Credibility

Quality adjustments further complicate interpretation. Methods that adjust prices for changing product features depend on judgment calls that are difficult to observe from the outside. When lived price changes diverge from reported inflation, confidence erodes-even when the methodology is defensible.

Measurement systems that require constant explanation are least effective when credibility matters most, particularly when central bank decisions are under unusually intense political scrutiny.

Modern Tools, Better Measurement

Advances in data processing strengthen the case for reform. Modern analytical tools already allow economists to process large datasets, improve validation, and enhance timeliness. Used appropriately, they can integrate high-frequency information into inflation measurement without replacing established statistical safeguards.

Technology does not redefine inflation. It improves how effectively it can be measured.

Taken together, these shortcomings point not to wholesale replacement of existing measures, but to targeted improvements that strengthen how inflation is measured and used.

What Should Change

Improving inflation measurement does not necessarily require wholesale redesign or abandonment of existing frameworks. The objective is more modest: to identify and address areas where incremental improvements would materially reduce lag, distortion, or confusion without undermining continuity.

Reform need not be radical; at a minimum, a review of current practices should include the following areas:

• Incorporate real-time rental indicators as formal complements to survey-based housing measures

• Update consumption baskets more frequently, with clear disclosure of timing and methodology

• Make quality adjustments more transparent and subject to regular review

• Clarify the relationship between CPI and PCE to reduce confusion in policy signals and indexation

• Treat statistical agencies as essential economic infrastructure, with redundancy and resilience

The Stakes

Inflation measurement informs monetary policy, which in turn shapes interest rates, asset prices, wage negotiations, and entitlement adjustments. When inflation measures are known to reflect earlier price conditions-and other well-documented limitations-policy debates shift from analysis to interpretation.

Better inflation measurement would not settle every policy debate, but it would reduce unnecessary noise and allow questions such as the appropriate inflation target to be debated on firmer ground.

The opportunity to improve inflation measurement is unusually clear, and there is little reason to defer it further.