Energy Doesn't Count In Inflation Because Energy Doesn't Count In Inflation... Huh?!
pic credit: Laura Gilbert
Watch Boston Fed President Eric Rosengren twist his tongue around the point that energy prices don't matter and don't have an effect on inflation because - surprise! - energy prices don't matter and don't have an effect on inflation. Wait, what?
While we have been experiencing disinflation generally, it is not the case for all prices. As Figure 13 shows, some prices have risen rapidly. Energy prices in particular have been rising, in response to robust growth in emerging markets. But outside of energy prices, most prices have shown little increase, and in fact a number of the major categories in the CPI index have experienced declines in prices.
To be clear, the Fed certainly cares about increases in energy prices, for two reasons. First, higher energy prices could potentially bring about long-lasting increases in the overall inflation rate. The Fed therefore monitors energy prices closely, given our mandate to keep overall inflation low and stable. Second, rising energy prices act as a tax on households and businesses, who often find it difficult to reduce their consumption of energy in the short run.
With regard to the first concern, our research suggests that the lasting effect of energy prices on overall inflation has been surprisingly small in recent years. For evidence, consider the enormous surges in oil prices in mid-2008, which were followed by significant declines in core inflation, as I mentioned earlier.
Does anyone else find that sort of logic absolutely precious?