Core Inflation: A Central Banker's Dream Scenario

Core inflation is a dream scenario that governments hope you'll believe is a valid indicator of real inflation. Of course, one must consider "incentive" when looking at any entity's motivation. That being said, what incentive does the government have to overshoot CPI? None. If anything, the disincentives are plenty; trade imbalances, increased Social Security payouts, and of course you have that tricky problem of the unwashed masses getting offended that their dollar now buys only 90 cents worth of goods. Or is that 70 cents in the 2 minutes that I've been writing this?

The ECB knows its role and is still defending core inflation as if anyone is still buying. That's cute.


The European Central Bank appears to be changing its view somewhat on the merits of core inflation as a gauge of price trends. In its latest monthly bulletin Thursday, the ECB said, “at the current juncture, it is particularly insightful to look at the less volatile components of the [consumer prices] in order to analyze the forces driving inflation.”

And based on the ECB’s view that core inflation “has been on a downward path since mid-2008 and shows no sign of reversing in the short-term,” there appears little reason to think they’re anxious to hike interest rates.

Whether central bankers should focus on headline inflation or core prices, which strip out volatile sectors like food and energy, has been a hot topic of debate for some time. The Federal Reserve was harshly criticized in some circles in the spring and summer of last year for cutting rates even as U.S. inflation soared on the back of record-high energy prices. Core inflation at the time was much more restrained.

The ECB has long focused on headline inflation, and is charged with keeping it below, but close to, 2% on an annual basis over the medium term. In late 2005 ECB President Jean-Claude Trichet touted the merits of focusing on headline as opposed to core. “It is of crucial importance to take a strictly forward-looking perspective, which does not allow much comfort to be drawn from the current, comparatively lower rates for measures of inflation that exclude certain components, such as energy or certain categories of food,” he said in December 2005.

What is the lesson here?

As long as you don't need to eat or heat your home or get anywhere, you're fine.

Even dumbass Forbes understands this simple concept. Sort of:

The Consumer Price Index, unveiled Thursday by the Bureau of Labor Statistics, shows that all that new money has yet to show up in prices. A look at the Federal Reserve's balance sheet shows that banks are simply hoarding a lot of it. From August to September, prices increased just 0.2%, in line with economists' expectations.

The threat of deflation is easing. In August prices had fallen 1.5% year-over-year, and so September's 1.3% decline is an improvement.

Economists especially focus on so-called ''core'' inflation--the price of everything minus food and oil whose prices can swing erratically. The pace of core inflation increased slightly to 1.5% in September from 1.4% in August. Core inflation had been slipping since May.

The CPI from July to September is used to determine the Cost of Living Adjustment for Social Security recipients. The negative reading on the CPI means that the size of Social Security checks will not increase for the first time since the automatic COLA was created in 1975. This is unwelcome news, especially for seniors spending a large part of their checks on health care. While prices in much of the economy are down, the cost of medical care has risen 4.1% in the past year.

It's like magic! Woooooo!

Anyway, I don't know about whoever the government gets its reports from but from where I am standing, everything is going up except for crap people don't need like flatscreens and Hummers. Duh. It doesn't get Ben Bernanke's shiny degree to figure out things aren't quite as they appear, or rather how they would prefer we perceive them.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


W.C. Varones said...

Of course core inflation is tamer; by excluding food and energy, it overweights electronics and autos and clothing and all the discretionary stuff nobody buys in a depression.

Wonderful. We have deflation in all the crap we don't need, and inflation in all the crap we do need.

Too bad we can't just eat flatscreen TVs.

What I don't understand about all of this is that people still listen to this crap and believe it. Core inflation is quite possibly the weakest argument in the central banker magic hat, after that crap about "price stability"... asshats.