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walt
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I am glad the Fed isn't concerned about inflation because I would rather leave interest rates where they are. But it is a fantasy to think that it isn't on the rise, and seriously so. Using the "core rate" (less energy and food) is a fictional concept designed to sooth the financial markets and distract them from the reality of rising inflation -- pure obfuscation. This article from 2005 is the best explanation yet about the reasons for focusing on the "core" rather than the real rate.
Submitted: Jun 29, 2007
Views: 846
Comments: 7
Likes: 56
View Article: http://www.financialsense.com/stormwatch/2005/0624.html
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Comments Received:
Great article. The government clearly is using a more convenient indicator.
Posted: Jun 29, 2007
Against this reality, Bernanke is absurd to be talking about his role as one of inflation fighting, yet to turn blind eye to the real indicators.
Posted: Jun 29, 2007
Right on. I have been looking for an explanation that made sense. Thanks.
Posted: Jun 29, 2007
I think this article is good but I don't think it's as simple as the author makes it out. For example, he discusses core inflation and the fact that it excludes energy. But in many ways it doesn't. The cost of energy shows up in many of the products that we buy. If we counted energy we would be double counting. Say you purchase a rubber tire. You'd be counting the increase in the cost of the rubber tire as well as the cost of the energy needed to produce it. But that increase in energy was already captured in the price. I think economists figured increases in energy would naturally impact the CPI so there was no need to count it seperately.
Posted: Jun 29, 2007
Comment on PhilR's comment. A problem in excluding energy is that people still have to get to work and to the store (to buy products whose price is higher due to energy inflation). Most people go to work and to the store by a gas-powered vehicle. They have to buy gas.
Posted: Jun 29, 2007
@cowmilker89
That's true and it's why it's included in the overall inflation numbers. It's just not in core inflation. I think part of the reason is that energy doesn't respond like other parts of the index. Its price is inelastic. So if you included it and energy spiked up due to a disruption in the Middle East, etc. it would spike the whole CPI. The same thing is true of food. The economists are trying to isolate more discretionary spending in my opinion via the core rate.
Now, how they use those rates and when they refer to them is another matter.
Posted: Jun 29, 2007
It is becoming clear to me know that Bernanke likes his role as purveyor of the bubble and is trying not to jeopardize it. Raising interest rates would exacerbate home price declines and end the private equity buyout spree, and could lead to slowdown in the economy. The Fed will use the indicators they want and in this case that is core inflation.
Posted: Jul 4, 2007
