Interest Rate Roundup

Friday, July 13, 2007

Fed taking some hits for its "core" obsession

Every single one of us who inhabits the real world knows that overall inflation has been a problem. Our daily budgets reflect it. We see it every day we fill up our gas tanks ... pay school tuition ... buy groceries, and more. Yet the Federal Reserve has steadfastly focused on "core" inflation the past few years. Now, it seems to be taking some flack for that approach.

San Francisco Fed President Janet Yellen was on the firing line yesterday, with some relatively tough questioning after a speech in Alaska. She deflected it, saying: "The focus on core is that is seems like it is a better predictor of the underlying trends that will effect total inflation going forward, not because that is the objective of policy." But I don't remember seeing so much focus on this conundrum before.

Meanwhile, in a separate speech in London, Bank of England Chief Economist Charles Bean said that targeting core inflation alone leads to "a risk that the resulting persistent swings in actual inflation will lead to inflation expectations becoming less well-anchored."

I will grant that SHORT-TERM volatility in inflation should be ignored. It makes perfect sense to discount a 10% or 20% spike in oil or gas prices in a given month if a hurricane strikes a bunch of oil platforms or causes a bunch of refinery shutdowns. Ditto for a regional drought that might cause crop to surge in the short-term, driving food prices higher.

But can anyone seriously look at the charts of futures prices for wheat ... corn ... oil ... gas ... soybeans ... or even lean hogs and make a case the long-term trend isn't higher? What about the grocery store price tags on milk, eggs, or my personal favorite -- Diet Coke? Prices have clearly been climbing, and with money growth surging and interest rates being held flat, we risk "accommodating" and cementing these price increases, therefore driving inflation higher over the longer term.


Post a Comment

<< Home

Site Meter