January 26, 2023

an interesting article from the Sunday New York Times. Oddly, I’ve never been to New York City, sometimes I wonder if I will ever go there…sometimes I wonder why I’ve never been there…is there something in me that has been avoiding New York? I certainly like the newspapers. I always like New Yorkers. Hmmm…maybe I really need to go to New York…
Enough of that. Now on to Inflation…
If You Don’t Eat or Drive, Inflation’s No Problem
ASIDE from the stuff that’s becoming more expensive, like food and energy, there is no problem with inflation in the economy. That’s the message economists want us to take from recent inflation reports.
On Oct. 14, the Bureau of Labor Statistics said the Consumer Price Index, the main inflation gauge, rose by a whopping 1.2 percent in September and by 4.7 percent in the last 12 months. The bureau also said the Producer Price Index, which measures inflation experienced by businesses, rose 1.9 percent in September alone.
Amid these alarming reports, many economists urged Americans to remain calm and to focus on the so-called core C.P.I. – the inflation measure that excludes the volatile costs of energy and food. The core rate rose just 0.1 percent in September, and is up only 2 percent in the last 12 months.
The dueling numbers seem to offer a classic case of how economists and consumers view the world differently. If only we lived in some futuristic biosphere where we didn’t need energy or food, inflation wouldn’t matter.
Government economists have been stripping out energy and food costs from the price gauge for more than three decades. After the Arab oil embargo of 1973, Arthur Burns, who was then the chairman of the Federal Reserve, correctly reasoned that temporary shifts in the price of oil shouldn’t influence monetary policy unduly. So he asked Fed economists to show him a measure of price changes that excluded energy costs. Later, he asked for one that also excluded food costs.
Steven Roach, chief economist at Morgan Stanley, was an economist at the Fed at the time. “When we were asked to strip out some of the most important things that people buy, my reaction was, ‘You’ve got to be nuts,’ ” he said. “These are the vital necessities of life.”
But Mr. Roach, like most other economists, has come to see the virtues of distinguishing between the so-called headline C.P.I. and the core C.P.I.
Prices of food and energy are notoriously volatile, and susceptible to supply shocks and acts of nature. Inflation in these vital sectors doesn’t necessarily indicate inflation across the economy. Mr. Roach notes that in the last year, consumer energy prices have risen 35 percent, while prices of other goods and services are up just 2 percent.
Economists also say the utility of the inflation measure depends on the question you are trying to answer. “If you want to know how much more it costs you to live this year than last year, look at the headline C.P.I.,” said Ann L. Owen, associate professor of economics at Hamilton College in Clinton, N.Y., and a former economist at the Federal Reserve. “And from a consumer’s perspective, there’s nothing good about a 4.7 percent increase in headline inflation in 12 months.”
Economists at the Fed aren’t obsessed with short-term pocketbook issues like high oil prices – and not just because many of them commute to work in Washington on the Metro. Rather, they focus on long-term economywide issues.
“You want to make sure that short-term monetary policy isn’t responding to a phenomenon that is just going to go away in a few months, or even a year,” said Stephen G. Cecchetti, economics professor at Brandeis University. “A change in an interest rate today will have an effect on inflation one to two years from today.” We would not have wanted the Fed to act as if the post-Katrina spike in gasoline prices were permanent, he noted.
What’s more, the Fed tends to focus on things that it can control. Not even a Fed chairman as powerful as Alan Greenspan can affect the price of oil by manipulating interest rates. “There’s nothing the central bank can do about that, unless it figures out how to produce more oil,” said Michael F. Bryan, vice president and economist at the Federal Reserve Bank of Cleveland.
But the Fed can control the amount of money circulating in the economy relative to the quantity of goods available. “So it tries to find the inflation signal common to all prices throughout the economy,” Mr. Bryan said.
Thus considered, the core C.P.I. may be the best tool the Fed has to monitor long-term changes in prices.
Still, economists see two good reasons not to ignore the headline number today. First, inflation in a crucial category like energy can worm its way into the entire system. “If high energy costs persist, and if they continue to rise, they may ultimately seep into the core,” Professor Owen said. The second reason has less to do with hard economic realities than with softer perceptions. The cost of gasoline is the economy’s most visible price. People see it every day even if they don’t buy gas every day, said Matthew Martin, senior economist at Economy.com. And most people buy food every week.
“If prices for those two things go up quickly, consumers will form the impression that inflation is high,” he said. “And if consumers begin to expect more inflation, they might be more tolerant of price increases.”
If that happens, the headline C.P.I. number could dominate the headlines.
Daniel Gross writes the “Moneybox” column for
If You Don’t Eat or Drive, Inflation’s No Problem – New York Times

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