Thursday, October 18, 2007


I've not quite figured out if the Fed really only focuses on "core inflation" or if it's just some concept that the press, reporting on the Fed, can't get its arms around. The reason to focus on so-called "core inflation," something which excludes trivial things like food and energy costs, month to month is that food and energy costs are volatile and tend to bounce around a bit. The core inflation number, which excludes this stuff, is thought to be less volatile and therefore a better measure of short term inflation. In other words, over a short time horizon, one can tease out trends from the core inflation number more accurately than one can tease out trends from the overall inflation number. But longer term the core inflation number should be ignored as food and energy costs aren't actually trivial things. So if over a period of 6 months or more food and energy costs consistently rise it isn't because they're volatile, it's because they're rising.