ECB on Core Inflation

Wow, turns out we were pretty timely with our response this morning.

This morning, the ECB chief noted that the "risks to the outlook for growth are judged to lie on the

No surprise there. But what really caught my was what Jean-Claude Trichet, President of the ECB, had to say about "core" inflation:

"As regards price developments, according to Eurostat’s flash estimate, the
annual HICP inflation rate increased strongly to 2.1% in September 2007, from
1.7% in August. As we have already indicated on previous occasions, we are now
entering a period during which unfavourable effects from energy prices will have
a strong impact on annual HICP inflation rates. Owing mainly to such effects, as
a result of the marked decline in energy prices a year ago combined with the
recent substantial increase in oil prices, we expect the inflation rate to
remain significantly above 2% in the remaining months of 2007 and in early 2008
before moderating again. Largely as a consequence of capacity constraints and
relatively tight labour market conditions, inflation is expected to be around 2%
on average in 2008.

Risks to the outlook for price developments remain on the upside. They
continue to include the possibility of further increases in the prices of oil
and agricultural products
as well as additional increases in administered prices
and indirect taxes beyond those announced thus far. Taking into account the
existence of capacity constraints, the favourable momentum of real GDP growth
observed over the past few quarters and the positive signs from labour markets,
stronger than currently expected wage developments may occur, and an increase in
the pricing power in market segments with low competition could materialise.
Such developments would pose upward risks to price stability. It is therefore
crucial that all parties concerned meet their responsibilities."   (emphasis added)

In other words, the non-core inflation level is rising, its significant, and its a threat to price stability. Focus too much on the Core to your own economy’s detriment . . .


UPDATE: October 4, 2007 5:10pm

Singer suggested posting this IMF White paper on the Core inflation rate.

The IMF describes the paper thusly:

This paper provides an overview of statistical measurement issues relating to alternative measures of core inflation, and the criteria for choosing among them. The approaches to measurement considered include exclusion-based methods, imputation methods, limited influence estimators, reweighting, and economic modeling. Criteria for judging which approach to use include credibility, control, deviations from a smoothed reference series, volatility, predictive ability, causality and cointegration tests, and correlation with money supply. Country practice can differ in how the approaches are implemented and how their appropriateness is assessed. There is little consistency in the results of country studies to readily suggest guidelines on accepted methods.

For those of you (especially on the prior post) who prefer a more formal or academic approach to critiquing inflation, have at it!

Download IMF_white_paper.pdf


Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
ECB Press conference, Vienna, 4 October 2007

Category: Commodities, Economy, Energy, Federal Reserve, Inflation

Inflation: CPI, Core Rate, Inflation ex-Inflation

Category: Commodities, Economy, Federal Reserve, Fixed Income/Interest Rates, Inflation, Psychology

Inside the Investor’s Brain

Last month, we got a terrific response to our posting of the entire first chapter of A Demon of Our Own Design.

I want to start doing this at least once-a-month, and plan on setting up an additional space to discuss the books in more details.

Peterson_high_resolution_cover Today’s book is by Dr. Richard Peterson’s Inside the Investor’s Brain: The Power of Mind Over Money.

Long time readers know that I have been a big fan of books that seek top explain how are brains are wired, and how this hard-wiring frequently sends us astray as investors.

Back in 2005, I wrote a column titled Know Thyself. Because Human nature so often runs counter to successful investing, its important to understand — and resist — many of your baser instincts.

The best book on the topic I have come previously across is Cornell Professor Thomas Gilovich’s How We Know What Isn’t So.  However, that is a bit of an academic work, focusing purely on human psychology. Some people have found it to be a bit dry, and it requires some imagination to apply the lessons there to investing and markets.

Inside the Investor’s Brain suffers none of these detractions. A few things make the book work especially well: 1) The author, Dr. Richard Peterson, is a psychiatrist who specializes in neuro-science studies; 2) Peterson is also a futures trader, so he has first hand experience as to the psychology pitfalls of trading (Peterson is launching a "Quantitative Psychology based Hedge Fund in 2008); 3) By combining these two disciplines, he has been acting as a consultant to large financial firms.

I found the book accessible and easy to read, filled with amusing anecdotes and illustrative examples.

Barron’s had this very laudatory review, stating simply: "IF YOU READ BARRON’S, AND APPARENTLY you do, read this

I would modify that: If you find the intersection of human psychology, markets and investing, than you should find this book rather intriguing.

Whether or not you Humans are capable of circumventing your own wetware in order to obtain alpha (out-performance) has yet to be determined . . .


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