I really did not need another must-read blog added to my list, but the Wall Street Journal's Real Time Economics feature has left me no choice. In last Friday's edition, Greg Ip detected some pebbles coming from the direction of glass houses:
The Federal Reserve has come under fire increasingly for focusing on “core” inflation rather than headline inflation. Excluding food and energy made sense, critics said, when those two were volatile but trendless. In recent years, however, they’ve mostly headed up, and thus core inflation has consistently lagged headline inflation.
This week’s issue of The Economist joins the criticism of core inflation, saying “Bond investors are living in a world where nobody eats or drives.” It notes Bank of England governor Mervyn King earlier this month said “measures of ‘core inflation’ that strip out certain prices can be highly misleading.” The bank’s chief economist Charles Bean leveled the same criticism last year in the heart of Fed territory, the annual symposium at Jackson Hole...
Yet when the Fed hears these criticisms from the British, it may wonder if the pot is calling the kettle black. The Bank of England targets a price index that excludes almost all housing costs, notably mortgage payments. And in the U.K. overall inflation, at 4.3% in May, is notably higher than the 2.5% inflation rate as measured by the index targeted by the Bank of England. The European Central Bank also excludes owner-occupied housing from the price index it targets, though that represents more than 10% of total consumption. Given housing’s sizable contribution to U.S. inflation last year, the Fed might have preferred the British target.
Or maybe not. Though the inflation rate measured by the CPI less its shelter component might have provided some comfort, the overall story remains pretty much the same:
I personally prefer to look at inflation over the "medium-term," say three to five years. Any help there? Nope.
What if that picture had turned out better? You might have said "so what", and I would have been with you. As far as I can tell -- and as I have said here many times before -- the predominant view among those of us who spend a lot of our lives thinking about such things is that core measures are useful insofar as they help us get a clearer real-time picture of where the overall inflation trend is headed. The Economist's jibe that "Bond investors are living in a world where nobody eats or drives" willfully ignores the real reason that core inflation is discussed in the first place.