Inflation in the Digital Age: Inflation Measurement and Bias in the 21st Century

In a highly timely move, several major central banks have announced a thorough review of their inflation targeting systems in recent months. Official statistics show that consumer inflation in the developed world has remained consistently below central banks’ target rates for almost a decade, in spite of the extraordinary efforts of these central banks. If central banks miss targets permanently, they may incur credibility problems and, over time, this could erode the social acceptance of their decisions. The world and our economies in it are undergoing an extraordinary transformation. 21st century megatrends such as digitalisation, the transformation of globalisation, ageing societies or even climate change are introducing new patterns into how economies function. Closely related to these megatrends, phenomena such as changing consumer habits and an increased importance of services pose new challenges for the measurement of economic processes, including the rate of inflation. One first step in the reconsideration of inflation targeting frameworks can be to correctly identify new types of bias in the measurement of inflation and to understand the new patterns determining the changes in consumer prices. Besides its challenges, technological progress offers new solutions as well. The widespread adoption of big data technologies has also created a significant opportunity for enhancing economic statistics; benefiting from these advantages, economic theory can help economic policymakers again, providing them with more solid support than over the past decade.