The Fed is Wrong on Core Inflation

Wednesday, August 30, 2006 | 10:22 AM

The release of Fed Minutes showed greater unaminity than was previously hinted at. That was the excuse for the intraday reversal yesterday.

A sharp-eyed observer noted:

"Volume had been barely pacing Monday. Until 2:00 p.m. when it started to crank. As a matter of fact, there was a boatload shoved thru as the clock struck 2 and for the next ~30 minutes. Local lore is attributing this jump in volume and in price to the good news of the FOMC minutes. The only question that remains is what kind of a speed reader could actually scan and digest the above-referenced 7 pages, 276 lines, 34 paragraphs and 3,336 words and start to act on it before the red headline ink was even dry. (emphasis added)

I'll say. The ramp started the instant the Fed minutes hit -- certainly not enough time for any mortal to have read and comprehended that much data. This looked like it was simply a large macro-player pushing indices around in a very thin tape.

This is not me "talking my book."  As I said in early August, I am contructive on the market for the next few weeks, but not much more beyond that.

The more interesting Fed related story the past few days was out of merry ole England, by way of Jackson Hole. Its seems that Charles Bean, the Bank of England's chief economist, is aghast at the absurd focus on the Core Rate of inflation by the U.S. Central Bank.

Dan Gross has the details:

"The US Federal Reserve is wrong to focus on core measures of inflation that exclude energy prices, Charles Bean, chief economist at the Bank of England, has suggested.

It should focus instead on headline inflation, which is much higher, he argued. Including energy and food costs, US consumer price inflation is running at an annual rate of 4.1 per cent, against 2.7 per cent for core inflation.

Mr Bean told the Fed's annual Jackson Hole symposium at the weekend that energy prices were rising for the same reason the price of many manufactured goods were falling: the rise of China and other emerging market economies. Since both price trends had a common cause, he said it makes little sense to focus "on measures of core inflation that strip out energy prices while not stripping out falling goods prices as well."

Mr. Bean did not mention the Fed by name but his implication was clear. Fed officials, including chairman Ben Bernanke, typically talk about measures of core inflation excluding volatile food and energy prices, which they say better predict future headline inflation.

Central bankers in Europe take a sharply different approach. Both the Bank of England and the European Central Bank put greater emphasis on talk of headline inflation, which includes the immediate "first round" effect of rising energy prices.

I find it rather discouraging that so obvious a statement needed to be publicly pointed out by an overseas observer, albeit a well placed one.

Inflation (ex-inflation) has now risen to the level of a national embarrassment.



BoE chief economist hits at US inflation measure
By Krishna Guhain Jackson Hole
Published: August 28 2006 03:00 | Last updated: August 28 2006 03:00

Wednesday, August 30, 2006 | 10:22 AM | Permalink | Comments (49) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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» Pre-meditated Rally from At These Levels
About that rally yesterday. I read the minutes and I did not see what the market saw, so it does look pre-meditated. [Read More]

Tracked on Aug 30, 2006 11:01:04 AM


Hey Barry- Ignoring inflation (or, at best, failing to adapt outdated measures to the modern world) seems to be an operational philosophy that the Fed and U. S. government will keep for a while. So the natural question is: How do you think this situation can be exploited for financial gain? I'll take f--ked up perspective all the way to the bank if I can...

Posted by: Sherman McCoy | Aug 30, 2006 10:58:09 AM

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