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QOTD: Bernanke on Inflation

Un-frickin-believable:

"Delivering a speech to the National Bureau of Economic Research, the Fed chief said "changes in energy [and food] prices should have relatively little influence on 'core' inflation, that is, inflation excluding the prices of food and energy."

(emphasis added)

There you have it -- straight from the Fed Chair's own mouth -- except for the items going up in price, there is no inflation!
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UPDATE: July 11, 2007 8:31am

Peter E. Kretzmer, senior economist for Bank of America, explains (more or less) what the Fed means  by relating "inflation expectations" to the ability of the Fed to impact price rises (i.e., stability):

“This Fed much more so than prior Feds puts a very heavy emphasis on the role of inflationary expectations,” he said. “They believe, and research shows, that inflation expectations and the Fed’s inflation-fighting credibility has a large impact on private sector wage- and price-setting behavior.”

In other words, the Fed's emphasis on Core inflation -- jawboning, PR, propaganda, whatever -- is every bit as important to future prices as the actual underlying causes (excessive monetary creation, demand exceeding commodity supplies) of inflation.

I am not sure I buy that. Surely, psychology is important, and the collective expectations of either higher or lower prices can impact subsequent price behavior. 

But this approach puts the Fed into the role of a low price cheerleader, and runs the dangerous risk fo well, artificially emphasizing the irrelevant core rate of inflation rather than dealing with reality of the actual price increases as experienced by consumers.

Additionally, it means that all of the prior chatter about removing volatile food energy prices due to their erratic price behavior was quite simply bullshit. Based on yesterday's Bernanke speech, we learn that the emphasis on the Core rate of inflation is about influencing psychology and sentiment -- not smoothing out volatile data.

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UPDATE 2: July 12, 2007 11:31am
Herb Greenberg mentions the latest comments from the CEO of Nestles:

Here's the article:

Nestle to cut plants, products as prices soar
Nestle, the world's largest food company, will raise prices, cull unprofitable products and speed up production rationalization to prepare for a lasting rise in commodity and energy prices.

Jose Lopez, management board member at the Swiss-based firm, told Reuters the group's focus on name-brands, health food, and medical nutrition puts it at a competitive advantage as prices for energy, grain and milk rise on surging demand.

Rising input prices globally will stoke inflation, which will enable Nestle -- maker of KitKat chocolates and Nespresso coffee -- to pass those costs on to consumers, Lopez said in his first interview as head of operations for the global giant.

"It could provoke moderate inflation and moderate inflation is not a bad environment for business," Lopez said in his first interview as head of operations for the global giant. "If anything, I can buy better because I am bigger."

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Sources:
Wall Street gets smacked
Major gauges fall over 1 percent after series of earnings warnings, more subprime news; investors weigh Bernanke speech.
David Ellis
CNNMoney.com, July 10 2007: 5:50 PM EDT
http://money.cnn.com/2007/07/10/markets/markets_530/index.htm?postversion=2007071017

Fed Chairman’s Talk Further Dims Hope for a Rate Cut 
JEREMY W. PETERS
NYT, July 11, 2007
http://www.nytimes.com/2007/07/11/business/11fed.html

Wednesday, July 11, 2007 | 06:05 AM | Permalink | Comments (53) | TrackBack (2)
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Comments

What I assume he means is that food and energy inflation has not yet pressured prices of items in the core CPI.

So its a bit less insane than it appears . . .

Posted by: Barry Ritholtz | Jul 11, 2007 6:11:32 AM