Inflation ex-inflation to be Official Fed Policy?

Well, it seems to be just about official: Inflation ex-inflation has formally become the policy of the Federal Reserve.

At least, according to voting Fed Governor Frederic Mishkin, who tells Bloomberg that Inflation Minus Food, Energy Is a `Better Guide’.

When reading his statements, I am reminded of the former Fed Chair Arthur Burns, who in the 1970s similarly did not want to include energy and food prices in his inflation measures. That "experiment" ended rather disastrously, with flat growth, and very high inflation, a condition that came to be known as stagflation.

Growth isn’t as weak today, and inflation isn’t as pernicious. But we do have strong commodity price increases, with GDP growth significantly slowing in the US. Add a weak US dollar versus a basket of global currencies (see America vetoes G7′s dollar alert). Then bring 2 billion new consumers into the global economy from India and China. (see Ship Shortage Pushes Up Prices Of Raw Materials), Next, add a hot war in the Middle East. Last, a Treasury Department hellbent on increasing the money supply. That’s the formula for what I call "demi-stagflation," and what my colleague Jeff Saut at Raymond James calls "Agflation."

All I ask is for the entities that measure the goods and services that make up our economy, and the bureaucracies that set government policy to accurately portray them, and stop the absurd emphasis on the non-inflationary items.   

Here’s the ubiq-cerpt:™

"Federal Reserve Governor Frederic Mishkin said inflation measures that exclude food and energy costs are a "better guide” to underlying changes in prices.

Changes in price indexes without food and energy "provide a clearer picture of underlying inflation pressures,” Mishkin said in the text of remarks to the HEC Montreal Macroeconomics and Monetary Policy Conference today. “If the monetary authorities react to headline inflation numbers, they run the risk of responding to merely temporary fluctuations.”

Mishkin argued that both so-called core and headline measures of inflation are useful to policy makers and the central bank shouldn’t rely on any one gauge. Sustained increases in energy costs can push up expectations for inflation, he said, noting that recent gains in oil are a "reminder that shocks can persist longer than one might have first expected.”

Does a 5 year run in energy prices and other commodities count as sustained?

The emphasis on Inflation ex-inflation continues . . .


Mishkin Says Inflation Minus Food, Energy Is a `Better Guide’
Craig Torres and Greg Quinn
Bloomberg, Oct. 20 2007

America vetoes G7′s dollar alert
Edmund Conway
Telegraph 1:19am BST 22/10/2007

Ship Shortage Pushes Up Prices Of Raw Materials
October 22, 2007; Page A1

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