Dan J. Harkey

Master Educator | Business & Finance Consultant | Mentor

Government Statistical Revisionism: III of III

Inflation targeting is especially sensitive to data revisions, because the entire framework depends on measuring deviations from a numerical target in real time. When inflation data subsequently change, they can retroactively reveal policy errors that were invisible—or unavoidable—at the time decisions were made.

by Dan J. Harkey

Share This Article

Here’s how revisions interact with inflation targeting mechanically, institutionally, and psychologically.

1.  Inflation Targeting Runs on Point Estimates That Aren’t Final

Inflation-targeting central banks (the Fed, ECB, BoE, etc.) operate around a numerical objectively 2% inflation over time. 

 Policy decisions hinge on:

  • Headline CPI / PCE inflation
  • Core measures
  • Short-term momentum (3‑, 6‑, 12-month annualized rates)

The problem: those numbers are provisional.

Revisions arise from:

  • Late price reports
  • Seasonal adjustment recalibration
  • Weight changes (e.g., Housing, healthcare)
  • Methodological updates

Yet rate decisions must be made before those corrections are made.

Inflation targeting assumes precision where only approximation exists.

2.  Revisions Can Create False “Misses” or False “Successes.”

Because inflation targets are numeric, even small revisions can materially change the policy interpretation.

False Miss (Overstated Inflation)

  • Initial data shows inflation above target
  • The central bank tightens or stays restrictive
  • Revisions later show inflation was closer to the target all along

Result:

  • Policy was tighter than necessary
  • Real interest rates were higher than intended
  • Output and Employment may suffer unnecessarily

False Success (Understated Inflation)

  • Initial data shows inflation falling toward the target
  • Central bank pauses or eases
  • Revisions later show inflation was stickier

Result:

  • Policy was looser than appropriate
  • Inflation expectations risk de-anchoring
  • Catch-up tightening becomes more abrupt

Inflation targeting magnifies the cost of being wrong—even temporarily.

3.  Revisions Complicate Inflation Expectations Management

A core pillar of inflation targeting is expectations anchoring—convincing households and markets that inflation will remain near target.

Revisions undermine this in two ways:

1.  Messaging Instability

When central banks say:

  • “Inflation is coming down.”
  • “Progress has been made.”
  • “We are near the target.”

…and later data revisions contradict those claims, credibility erodes—even if the original statement was reasonable at the time.

2.  Market Skepticism

Markets begin to:

  • Discount official inflation prints
  • Focus on alternative indicators
  • React more violently to each new release

If inflation is constantly revised, expectations become conditional rather than anchored.

4.  The Asymmetry Problem: Tightening Errors Hurt More Than Easing Errors

Inflation‑targeting regimes are often asymmetric in practice, even if they claim symmetry in theory.

  • Overshooting inflation → reputational damage
  • Overshooting unemployment → often tolerates later

Because of this:

  • Central banks may err on the side of tightness when inflation data is uncertain
  • Revisions that later show inflation was overstated do not trigger proportional regret or reversal

This bias can result in:

  • Prolonged restrictive policy
  • Delayed recognition of disinflation
  • Harder landings than necessary

Revisions don’t just correct inflation; they expose institutional risk preferences.

5.  Core vs. Headline: Revisions Shift the Goalposts

Inflation targeting relies heavily on core measures (excluding food and energy), but these are not revision-proof either.

Common issues:

  • Housing inflation (especially Owners’ Equivalent Rent) adjusts slowly and is revised
  • Healthcare and insurance pricing are revised with administrative data
  • Seasonal factors are re-estimated annually, altering past inflation paths

As a result:

  • “Underlying inflation” can look persistent in real time
  • Later revisions show that earlier disinflation was already underway

This can cause central banks to fight inflation that has already peaked.

6.  Inflection Points Are the Danger Zone

Revisions are most destabilizing for inflation targeting when inflation is:

  • Peaking
  • Bottoming
  • Transitioning between regimes

At those moments:

  • Models extrapolate persistence
  • Central banks assume momentum
  • Revisions later reveal that turning points were missed

Historically, many tightening cycles continued after inflation had already begun to fall in real terms, as later revisions confirmed.

That is not incompetence—it is structural lag.

7.  How Central Banks Try to Adapt (With Limits)

To mitigate revision risk, inflation-targeting central banks:

  • Use trimmed‑mean and median inflation measures
  • Emphasize multi-month averages
  • Track inflation expectations surveys
  • Monitor wage growth and unit labor costs

However, none of these escapes the core constraint: policy must be set before inflation data stabilizes.

Inflation targeting is therefore less a precision instrument than it appears—especially during volatile periods.

Bottom Line

Revisions affect inflation targeting by distorting the real-time signal on which policy is based.

  • They can turn apparent inflation “misses” into illusions
  • They bias policy toward overtightening
  • They weaken expectations anchoring
  • They reveal errors only after costs are sunk

Inflation targeting works best in stable environments—and performs worst precisely when it is needed most.