Fed Inflation Soars

Article excerpt


If you were in Baltimore, Md., or Sydney Australia last week and followed the news about U.S. consumer inflation, you read that in March "core prices rose at the fastest rate in 12 years."

If you were almost anywhere else, you read, as the Associated Press reported, that March showed "the biggest gain in core inflation in a year." Big difference. Which story was right?

Both were right about the data they reported since there were two core inflation estimates released on the morning of April 19, one by the U.S. Bureau of Labor Statistics (BLS) and the other by the Federal Reserve Bank of Cleveland. But, as often happens in the topsy-turvy world of statistics, the second-best inflation number was given the widest publicity while the preferred estimate was mostly ignored.

It wouldn't have greatly mattered if the two estimates told the same story. But they didn't.

Core price indexes attempt to measure the underlying rate of inflation by eliminating the influence of volatile components. The resulting estimates of trend inflation powerfully influence markets and price expectations and, not least, the Federal Reserve's interest rate decisions.

The BLS measure of core consumer price inflation simply excludes all food and energy components from the total index. In general, these components tend to be volatile from month to month, and their exclusion is the traditional, albeit outdated, method of computing core inflation.

By comparison, the Cleveland Fed's core consumer price index is a weighted median of all the items in the consumer price index (the median is the point where half the price changes in the index are larger and half are smaller). It has the virtue of not excluding any price components in the overall index, yet greatly reduces the influence of extreme price changes. Creators of the median index found it better forecasts inflation than the traditional BLS core price index.

In March the BLS core price measure, seasonally adjusted, rose at a discomforting 4.2 percent annualized rate, the biggest monthly gain in a year. …