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Real World Consequences of Core Inflation Focus

Thursday, October 18, 2007 | 11:00 AM

in Federal Reserve | Financial Press | Inflation | Taxes and Policy

A pair of not unrelated stories:

First, today's Dumb Headline of the Day, is this annoying piece courtesy of the NYT:

Core Inflation Remains Steady, Presenting a Puzzle to the Fed
http://www.nytimes.com/2007/10/18/business/18economy.html

The first few paragraphs mix assumptions, info and conjecture into, well, I really don't know what:

"Hopes that the Federal Reserve will again cut interest rates at the end of the month were further reduced yesterday after a report showed inflation holding steady in September. But a worsening housing slump and a mixed economic outlook could put the Fed in a difficult spot as it considers what steps to take in the months ahead.

Prices of consumer goods ticked up 0.3 percent in September, a slightly higher-than-expected increase that reversed a 0.1 percent decline in August."

Slightly higher than expected? Consensus was for 0.2% -- so this was only 50% above expectations.

Back to the ~~stenography~~ article:

"The Consumer Price Index’s core rate, a gauge of inflation that excludes relatively volatile food and energy prices, held at 0.2 percent, where it has been since June, the Labor Department said yesterday.

The report suggests that pricing pressures have remained in check. But the Fed, always wary of inflation risks, prefers a slower rate of 1 percent to 2 percent. Overall inflation was up 2.8 percent compared with September 2006, its highest 12-month growth rate since March. Higher prices for rent, gasoline and food, especially fruit and vegetables, led the increase as consumers began to feel the effects of surging oil prices and a weaker dollar.

The inflation picture, coupled with recent reports that have indicated a more resilient economy than analysts expected, makes it more likely the Fed will keep rates unchanged when it issues its decision on Oct. 31."

Note that Fed fund futures increased the odds of a cut at the October 31st FOMC meeting . . .

~~~

Next, we look at the real world consequences of this artificial self-destructive focus of inflation ex-inflation:

Social Security Checks to Rise 2.3%
Cost-of-Living Adjustment Is Smallest Since '03

Payments to Social Security recipients and most federal retirees will increase 2.3 percent in January. It is the smallest cost-of-living adjustment since 2003, reflecting a lower rate of inflation.

The adjustment will increase the average monthly Social Security retirement benefit by $24, to $1,079. It is based on the rise in the consumer price index in the third quarter, a figure the Labor Department released yesterday.

The increase directly affects the finances of about 50 million people, including more than 31 million Social Security retirees and 11 million people who receive disability or other supplemental income from the Social Security Administration. It is also a significant number to the more than 4 million federal government and military retirees, about 500,000 of whom live in the Washington region.

So despite the enormous rise in energy, food costs, housing expenses, insurance, medical coverage, we see that Social Security is barely budging.

When we said that "Inflation is the cruelest tax," now you know what we mean.

Y'all keep focusing on the core . . .

Source:
Core Inflation Remains Steady, Presenting a Puzzle to the Fed
MICHAEL M. GRYNBAUM
NYT, October 18, 2007
http://www.nytimes.com/2007/10/18/business/18economy.html

Social Security Checks to Rise 2.3%
Cost-of-Living Adjustment Is Smallest Since '03
Howard Schneider and Neil Irwin
Washington Post, Thursday, October 18, 2007; Page D01
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/17/AR2007101700215.html