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Department of "Huh?!": Core Inflation Watch

Ummmm... Core inflation is not a good forecaster of future inflation only if "variations in the prices of agricultural and energy products... [are] temporary."

Core inflation is a good forecaster of future inflation as long as variations in the inflation rate of agricultural and energy products are temporary.

If agricultural and energy prices jump and stay at their new levels--which is what is happening--then no problem. It's only if agricultural and energy prices diverge from other prices and the proportional divergence keeps growing and growing and growing--which it isn't.

This isn't rocket science...

Lorenzo Bini Smaghi:

Ignoring the core can keep inflation at bay: Figures this week showed the eurozone’s inflation slow slightly during May. But with recent price rises around the world fresh in our memory, the importance of keeping a watchful eye on inflation is as strong as ever. Yet even as the financial crisis has pushed economists to reconsider the methods they use to interpret and forecast economic trends, one concept seems difficult to remove: core inflation. Core inflation... is calculated by excluding food and energy products from the basket of goods and services that represent a household’s typical spending.... The rationale for excluding food and energy, however, is that they tend to fluctuate sharply, as we have seen with recent rises and falls in the price of oil. This volatility is then passed on into the general price index, in turn making it difficult to interpret the overall trend. Because core inflation data are less volatile, its advocates claim, it allows a better extrapolation of future [inflation] trends. However, for core inflation to be a good basis for forecasting headline inflation, the variations in the prices of agricultural and energy products have to be temporary...

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