This series of charts looks at the relationship between official CPI, Alternative CPI, and Federal monetary policy.
This chart below examines official CPI, Alternative CPI, and the Federal Funds Rate. The interesting (and rather surprisingly) takeaway is that the Federal Funds Rate (FFR) was better correlated with our Alternative CPI measure than the official CPI measure from 1988 to 1997, with the FFR consistently being set at a 100 to 200 bp spread over Alternative CPI. The bizarre aspect of this is that the official CPI and FFR did not correlate quite as well.
Some time in the late ’90s, this relationship broke down and Alternative CPI shot up over official CPI. Then, the two figures stayed near one another for a few years, before moving in completely different directions in 2002. Our figures suggest that the Federal Funds Rate should have been set significantly higher during this period.
The below chart makes the same comparisons, except we look at Core CPI and Alternative Core CPI.
The final chart in this series examines Alternative CPI, the Federal funds rate, and M2 money supply.