Today the government released the consumer price index. The media largely downplayed signs of inflationary pressures, as the month-over-month core rate of inflation was a mere 0.2 percent. The following quote taken from today’s Chicago Tribune is representative of the overall response to today’s inflation numbers:
“Excluding food and energy, consumer prices rose 0.2 percent slowing from January’s 0.3 percent advance.
The generally benign underlying price pressures should give the U.S. central bank scope to keep pumping money into the economy, despite signs of improvement in labor market conditions.”
Before we break out the champagne, we think a further look at the numbers is warranted.
When it comes to measuring inflation, the government reports two numbers, one called “core” CPI inflation and the other called “headline” CPI inflation. (Ironically, it is the “core” CPI inflation number that usually grabs all the headlines.)
Headline CPI inflation is measured by considering all the items purchased by a typical household, and seeing how much the prices went up on average. Makes sense, doesn’t it? And when you examine today’s headline CPI inflation, prices went up month-over-month by an amount of 0.7 percent.
By way of contrast, core CPI inflation is calculated by looking at a typical household’s purchases, but then tossing out food and energy. So the core CPI inflation rate might be meaningful to a person who doesn’t use any gasoline, electricity, natural gas, or eat food. For the rest of us, it is the headline CPI that matters.
Naturally, lots of us wonder what the government’s rationale could possibly be for excluding two of the most important items in any household’s budget from the calculated “core” rate of inflation. To skeptics, the reason is simple: the inflation rate appears lower if you exclude those items whose prices are going up. But perhaps we are being too harsh on the government by presenting only one side of the story. The government’s own economists would tell you that core inflation is more relevant than the headline number because food and energy prices are really quite volatile. By excluding food and energy, they will argue, we get a better picture of underlying inflationary pressures in the overall economy.
Well, OK, maybe food and energy prices are volatile. All that tells us is that the thing we are trying to measure, which is inflation, is volatile! Putting your head in the sand and ignoring two of the largest items in any household’s budget may allow for bureaucrats and central bankers to conclude prices are rather stable, encouraging them to continue creating more money. But for shoppers a low core rate of inflation means zilch.