MNI INTERVIEW2: Ex RBA Board Member Argues For Real-Time Data

Central banks should focus more on real-time spending data during supply-side driven price shocks rather than relying so heavily on traditional consumer price indices, a former Reserve Bank of Australia board member working with the European Central Bank on better use of economic metrics told MNI.

Measures of CPI fail to capture the diversity of spending patterns across demographics, and can be hard to compare between jurisdictions due to their varying criteria, said Warwick McKibbin, who favours replacing central bank inflation targets with objectives for growth in nominal income.

“Central banks can’t really see what’s going on with actual spending in the economy by looking at the CPI,” McKibbin, now Australian National University economics professor and an RBA board member between 2001-2011, said in an interview. “But we have instant data on department store receipts, a whole range of credit-card data, and we know in real time what spending is happening in the economy and to me that’s a better goal for policy as it captures both inflation and output and they’re bundled together so there’s no index to create – it’s just the total amount of spending.”

MORE ACCURATE TOOLS

Marginal trade-offs between inflation and real growth are less significant than maintaining nominal growth within a range where inflation is relatively low, "unless there’s a weakening economy, where we might want to have a bit of higher inflation, if output growth is weak,” argued McKibbin, who has presented his ideas to the European Central Bank and hopes to contribute to its next strategy review.

But policymakers need more accurate tools, he said.

“And that comes back to the original question, ‘what type of index should you have?’ Well, that depends on the ultimate objective. If that is the trade-off between real-economy growth and inflation, then those two targets are contained in a nominal-income target.”

Current spending data would allow central banks to formulate real-time opinions on the economy without “looking in the rearview mirror,” McKibbin noted. “It is noisy, so you need techniques to filterout the noise for the signal, but for me that’s where we should be heading – not driving at night looking in the rearview mirror without the lights on.” (See MNI INTERVIEW: Gov'ts Fuelling Inflation- Ex RBA Board Member)