Thursday, June 7, 2007

Problems With How Inflation is Reported??????

I am glad to read in Reuters (via the Big Picture) that someone else is also concerned about how inflation is reported. Any body who has put gas in their tank or gone grocery shopping in the last couple of years knows that there is something wrong with the CPI as reported. Ultimately it hurts the credibility of the institutions reporting and using the data. Why not report a CPI with and without energy and food?

The Federal Reserve's adherence to core inflation, which strips out food and energy prices, is taxing the public's patience and risks credibility, a senior U.S. central banker said on Thursday.

"In the United States over the last 20 years, core measures excluding food and energy did take out a lot of noise. But in the last three years it has been extracting quite a bit of signal," said Harvey Rosenblum, head of research at the Federal Reserve Bank of Dallas.

Central bankers study core inflation because it is supposed to remove volatile one-off price movements to reveal an underlying "signal" of price pressures. But this practice is challenged when the components being removed keep rising.

"In the last three years, energy has moved in one direction for the most part, and food over the last two years has moved primarily up. And it is becoming annoying to people to see the central bank exclude those," he said.

As well as source of irritation, there were risks to being seen as out of touch with the real world for policy-makers trying to influence economic behavior through their communication strategy and interest rate decisions.

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