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Why aren’t energy, food in inflation rate?

John Dimsdale Dec 13, 2007
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Why aren’t energy, food in inflation rate?

John Dimsdale Dec 13, 2007
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KAI RYSSDAL: The wholesale inflation number is a much-easier-to-digest 3.4 percent when you break it down by month. Still, it is the biggest jump since the U.S. was trying to pay off the war in Vietnam. That would be August, 1973 for the economic historians among you. As they always do, the guys with the green eye shades gave us another number today, something they call the “core rate of inflation.” It strips out always-volatile food and energy costs, and gives us get a much less scary number — inflation at four tenths percent. But since we all do eventually wind up buying food and gas, does that number mean anything?

We asked our Washington bureau chief John Dimsdale to check it out.


JOHN DIMSDALE: To find out about the core rate I went to economist James Galbraith at the University of Texas. He says it’s a rate-setting signal for the Federal Reserve. He acknowledges that Americans do pay to drive and eat.

JAMES GALBRAITH: But that doesn’t mean that one wants monetary policy decision makers to react each time the price of oil or the price of food moves up or down.

Galbraith says without energy and food, the major element left in the core inflation rate is the change in wages. So this is how the Fed can see when gas and groceries are pushing up wages and other less volatile items. Right?

GALBRAITH: Problem there of course is that by the time that’s happened it’s a bit late for monetary policy to react to it. But if the core rate isn’t all that useful and the non-core rate isn’t useful, it’s not clear what in the inflation measurement is in fact a useful guide for monetary policy makers. Exactly where they should be focusing attention becomes a little vague.

Ahh — now it’s all perfectly clear.

In Washington, I’m John Dimsdale for Marketplace.

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