Straight Story: At the core of inflation

Economics editor Chris Farrell

TEXT OF STRAIGHT STORY

Scott Jagow: Time now for the Straight Story with our economics editor Chris Farrell. Hi Chris.

Chris Farrell: How're you doing, Scott?

Jagow: I'm doing all right. The Consumer Price Index -- also known as the CPI -- came out this week. Food prices had their biggest jump in 18 years, gas is at $4.00 a gallon and the headline was "Inflation Pressures Eased in April."

Farrell: And if you take out food and energy, the outlook was even better.

Jagow: That's what I mean. How can that be if we have such a big jump in food prices?

Farrell: Part of it is the Consumer Price Index is trying to capture a large basket of goods and services, but the ones that we are so aware of right now... I mean how often do you go out and buy a computer?

Jagow: Well, not very often.

Farrell: But you go to the grocery store at least once a week and every time you go in there, you go, "Oh, look at this bill! It's gone up!"

Jagow: But we're always told to look at the core rate of inflation in terms of whether or not there is a threat of inflation, that is, taking out energy and food, the two things that we're most aware of. Why is that the case?

Farrell: You don't want to pay attention to the core rate of inflation. What really matters is "what's happening to my cost of living?" I think that's the right way to look at it, but now I'm a policy maker and I'm in a position where I'm going to have to decide: we have a weak economy, but do I need to raise interest rates to combat inflationary forces? So the reason why I take out these volatile food and energy prices is to see whether or not those price increases are seeping throughout the economy because businesses are saying, "We've got to pass on these higher energy costs." So from a policy maker's point of view, the core rate of inflation is not a manipulation.

Jagow: All right, so at the dinner table, people probably aren't talking about the Consumer Price Index; they're talking about the price of...

Farrell: I'm shocked.

Jagow: ...the price of bread. But the CPI does have some impact on their lives. As you just said, it helps determine policy, so where do we feel the impact?

Farrell: First of all, if you're on Social Security, you're very aware of the Consumer Price Index because your increased Social Security payments are pegged to the changes in the CPI. The second one is anyone who is working. Management typically pegs their wage increases to what's going on with the Consumer Price Index.

Jagow: If you're a cynical guy, Chris, you might think that the Fed uses the core rate of inflation as sort of a deflection measure, but you say the Fed is not manipulating here. Why not?

Farrell: I mean, I don't think there is a manipulation. There is a genuine attempt to try and understand "Are increases in food and energy seeping into the rest of the economy?" One of the things that's optimistic about the latest numbers is that it does appear that the overall rate of inflation is modulating. There is not a great deal of inflationary pressure throughout the economy and what that says is that the Fed may win its gamble. It cut its benchmark interest rate to offset the credit crunch and it got a lot of criticism, Scott, from people saying we were going to have virulent inflation. It turns out I don't think we're going to get it and therefore, the Fed isn't going to have to raise its benchmark interest rate, which by the way would take another hit out of everyone's pocketbook.

Jagow: All right. That's the Straight Story from Chris Farrell. Talk to you a little later, Chris.

Farrell: I look forward to it.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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