If you had even a glance at today's report on consumer-price inflation in May, it would have been hard to miss the pretty significant dichotomy between the growth in overall prices and the inflation rate measured by so-called core measures. And if you did miss it, you can fill yourself in at The Street Light, at The Prudent Investor, at The Capital Spectator, and at the Big Picture. For some, like my friend (and Brandeis professor) Steve Cecchetti, the core report feels like victory:
I wish that the Boston Red Sox were doing as well in maintaining their lead in the American League's Eastern Division as the Federal Reserve's Open Market Committee is at keeping inflation under control. The former have been slipping badly, losing six of their last ten games at the same time that the dreaded Yankees have won nine of ten. By contrast, this morning's Bureau of Labor Statistics release confirms that the latter is right on track to bring inflation down to levels that make us all comfortable.
Today's numbers do show a rather large increase in the all-items CPI for the month of May: 8.4 percent at an annual rate (a.r.). But this hefty rise is primarily a result of yet another large gasoline price increase. Energy prices overall rose 5.4 percent for the month; that's 88 percent at an annual rate.
Core measures of inflation, designed to remove short-term volatility, increased by much less. The traditional core, the CPI excluding food and energy. rose 1.8 percent (a.r.), while the Median CPI computed by the Federal Reserve Bank of Cleveland increased an extremely modest 1.0 (a.r.). And the 16 percent trimmed mean, increasingly my favorite inflation indicator, is up only 2.3 percent. Looking over the past 12 months, we see that headline inflation of 2.7 percent, while various core measures registered between 2.2 and 3.1 percent.
The Nattering Naybob, on the other hand, is none too impressed with Steve's attitude:
This on the heels of a CPI proving stagflation is ragin in double digits with the 2nd largest monthly increase in 16 years.
Where do they hand out these PHD's??? (Piled High and Deep)....
That's a little harsh, especially when there are plenty of good reasons to champion core inflation as a guide to monetary policy. Still, I'm unwilling to argue that the critics of core, nattering and otherwise, are completely off base. Earlier this week, Cleveland Fed president Sandra Pianalto had this to say:
... inflationary risk can occur when large and persistent relative price shocks temporarily ripple through the inflation data. The obvious example is energy prices, although we see such changes in commodity prices more generally. These price pressures are temporary and so do not represent changes in the inflation trend. Still, a central bank cannot ignore them if it hopes to maintain credibility for delivering low and stable inflation.
Since 2005, the three- to five-year moving average of U.S.inflation has hovered around 3 percent. This is above where I would like to see the trend settle in the longer run. The reality of rising oil and commodity prices is evident, and my Federal Reserve colleagues and I have been clear that we believe the impact of these influences will dissipate over time. But until our beliefs are validated by the data, there is a risk that the public's trust could erode and inflation expectations could move higher.
Unfortunately, the data is definitely not validating:
And if "the public's trust" were to erode? Well, that would be bad.