« Bush taps Bernanke for Fed Chairman (Econoblog alert!) | Main | Alan Bjerga understands guanxi »
October 24, 2005
Core vs headline CPI: The debate continues
Daniel Gross has the lastest installment in the NY Times:
Prices of food and energy are notoriously volatile, and susceptible to supply shocks and acts of nature. Inflation in these vital sectors doesn't necessarily indicate inflation across the economy. Mr. [Steven] Roach notes that in the last year, consumer energy prices have risen 35 percent, while prices of other goods and services are up just 2 percent.
Economists also say the utility of the inflation measure depends on the question you are trying to answer. "If you want to know how much more it costs you to live this year than last year, look at the headline C.P.I.," said Ann L. Owen, associate professor of economics at Hamilton College in Clinton, N.Y., and a former economist at the Federal Reserve. "And from a consumer's perspective, there's nothing good about a 4.7 percent increase in headline inflation in 12 months."
...
What's more, the Fed tends to focus on things that it can control. Not even a Fed chairman as powerful as Alan Greenspan can affect the price of oil by manipulating interest rates. "There's nothing the central bank can do about that, unless it figures out how to produce more oil," said Michael F. Bryan, vice president and economist at the Federal Reserve Bank of Cleveland.
But the Fed can control the amount of money circulating in the economy relative to the quantity of goods available. "So it tries to find the inflation signal common to all prices throughout the economy," Mr. Bryan said.
Thus considered, the core C.P.I. may be the best tool the Fed has to monitor long-term changes in prices.
Still, economists see two good reasons not to ignore the headline number today. First, inflation in a crucial category like energy can worm its way into the entire system. "If high energy costs persist, and if they continue to rise, they may ultimately seep into the core," Professor Owen said. The second reason has less to do with hard economic realities than with softer perceptions. The cost of gasoline is the economy's most visible price. People see it every day even if they don't buy gas every day, said Matthew Martin, senior economist at Economy.com. And most people buy food every week.
And with this, I inaugurate the "inflation" category on the blog. Previously, inflation had been categorized under "data" or "Federal Reserve" depending on the context. Someday I might even have time to totally overhaul the categories. We'll see.
Posted by William Polley at October 24, 2005 04:18 PM
Trackback Pings
TrackBack URL for this entry:
http://www.williampolley.com/cgi-bin/mt-tb.cgi/402