Straight Story: Food, energy and inflation

Marketplace Staff May 18, 2007
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Straight Story: Food, energy and inflation

Marketplace Staff May 18, 2007
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TESS VIGELAND: It’s time once again for our economics editor, Chris Farrell, to help you sort out what’s smart, what’s stupid and what’s the Straight Story. And Chris, the federal government’s data meisters came out with their latest measure of inflation this week, the consumer price index. And for April, prices at the checkout counter rose 0.4 percent, but as always, when this number comes out, we hear this caveat. Do you care to say it for me?

CHRIS FARRELL: Absolutely. Take out food and energy, and you get the core rate of inflation.

VIGELAND:
Drive me nuts. All the headlines this week were like, hey, gas and food prices are up, but hey, take them out and inflations attain 0.2 percent. But Chris, I still pay for food and energy. And in fact, I saw that the government is predicting, we’re going to see the fastest jump in grocery prices in the last 15 years. So why do economists insist on pretending it’s not a factor in inflation?

FARRELL:
Look, I understand the frustration, Tess. Just as you mentioned, you know, food is expensive. It’s getting more expensive. And, you know, gasoline prices, they’re set to break the record that was reached back in 1981, ouch. But energy prices, food prices are volatile, very volatile. So here’s the straight story, the real question is, are rising food and fuel prices triggering a broad jump in the cost of living? And the answer is no.

VIGELAND:
All right. Well, let’s talk about this whole issue of volatility because…

FARRELL:
OK.

VIGELAND:
…really gas and food prices have been rising pretty steadily the last several months, how does that not a trend make?

FARRELL:
You know, yes, gasoline is more expensive. We all know that. How long have we been talking about this?

VIGELAND:
A long time.

FARRELL:
And it’s been quite a while now, you know. And yet, when you look at the price of clothing, the price of toothpaste, you sort of think this whole economy, this rising price of gasoline and food has not spilled over into the rest of the economy. Look, when you listen to the radio and has a lot of static, you want to filter out that static . . . all these signals, inflation signals, but there’s a lot of static. And what we’re really trying to do is put on these filters and that’s what core rate of inflation is, it’s just a filter, a quick snapshot, and any snapshot has its flaws, but it is an attempt to look at what’s happening beneath the surface.

VIGELAND:
I guess I kind of get that, but I still don’t understand that if food and fuel prices are rising, doesn’t that by definition mean that our cost of living is rising?

FARRELL:
The jargon term is relative prices. And in an economy like ours, you know, prices are always changing. I live in a high-inflation economy and the reason is I have a wonderful child that’s in college. The relative price of sending a child to college, and I have another one coming along, and it’s going to be even higher when he goes to college. But that doesn’t mean the overall rate of inflation is rising.

VIGELAND:
So why don’t we just take out food and energy from this whole equation then?

FARRELL:
I wish we could. But here is the reason why. What’s the question that we’re trying to answer, food’s up, energy is up, is it spilling over to the rest of the economy? And so, we included overall, we try and look at the underlying trend. But here is also what we do, we don’t just look at the consumer price index. I mean that’s the index we know, but there recently came out import prices are down. Personal consumption expenditure price index, this is the one Alan Greenspan loved. It’s a broader measure of inflation. It’s down. And the overall trend, guess what? Ben Bernanke is not a bad economist. Basically, he’s been forecasting that we’re going to have moderate economic growth and moderate inflation. And that seems to be the economy we’re getting.

VIGELAND:
Let me ask you one more question. Now, this has been a great education, but I still want to know how high prices for food and energy don’t trickle in to the rest of the economy?

FARRELL:
Look, what companies would love to do is raise their prices. The price of energy, it’s very, very important into making anything. They have higher energy prices.

VIGELAND:
Right. Right.

FARRELL:
The problem is the consumer is not doing well on the wage front. So sure companies can go ahead and try and pass on the cost, guess what the consumer is going to do. They’re going to go to a product or a store that will not raise their price so companies cannot pass on the higher cost of energy these days.

VIGELAND:
All right. The Straight Story from our man, Chris Farrell. Chris, I think you’ve made it so that the next time the CPI comes out, I won’t tear my . . .

FARRELL:
That’s progress.

VIGELAND:
Thanks so much.

FARRELL:
Thanks a lot.

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