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ECB on Core Inflation

Wow, turns out we were pretty timely with our response this morning.

This morning, the ECB chief noted that the "risks to the outlook for growth are judged to lie on the downside."

No surprise there. But what really caught my was what Jean-Claude Trichet, President of the ECB, had to say about "core" inflation:

"As regards price developments, according to Eurostat’s flash estimate, the annual HICP inflation rate increased strongly to 2.1% in September 2007, from 1.7% in August. As we have already indicated on previous occasions, we are now entering a period during which unfavourable effects from energy prices will have a strong impact on annual HICP inflation rates. Owing mainly to such effects, as a result of the marked decline in energy prices a year ago combined with the recent substantial increase in oil prices, we expect the inflation rate to remain significantly above 2% in the remaining months of 2007 and in early 2008, before moderating again. Largely as a consequence of capacity constraints and relatively tight labour market conditions, inflation is expected to be around 2% on average in 2008.

Risks to the outlook for price developments remain on the upside. They continue to include the possibility of further increases in the prices of oil and agricultural products as well as additional increases in administered prices and indirect taxes beyond those announced thus far. Taking into account the existence of capacity constraints, the favourable momentum of real GDP growth observed over the past few quarters and the positive signs from labour markets, stronger than currently expected wage developments may occur, and an increase in the pricing power in market segments with low competition could materialise. Such developments would pose upward risks to price stability. It is therefore crucial that all parties concerned meet their responsibilities."   (emphasis added)

In other words, the non-core inflation level is rising, its significant, and its a threat to price stability. Focus too much on the Core to your own economy's detriment . . .

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UPDATE: October 4, 2007 5:10pm

Singer suggested posting this IMF White paper on the Core inflation rate.

The IMF describes the paper thusly:

This paper provides an overview of statistical measurement issues relating to alternative measures of core inflation, and the criteria for choosing among them. The approaches to measurement considered include exclusion-based methods, imputation methods, limited influence estimators, reweighting, and economic modeling. Criteria for judging which approach to use include credibility, control, deviations from a smoothed reference series, volatility, predictive ability, causality and cointegration tests, and correlation with money supply. Country practice can differ in how the approaches are implemented and how their appropriateness is assessed. There is little consistency in the results of country studies to readily suggest guidelines on accepted methods.

For those of you (especially on the prior post) who prefer a more formal or academic approach to critiquing inflation, have at it!

Download IMF_white_paper.pdf

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Source:
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
ECB Press conference, Vienna, 4 October 2007
http://www.ecb.int/press/pressconf/2007/html/is071004.en.html

Thursday, October 04, 2007 | 12:35 PM | Permalink | Comments (33) | TrackBack (0)
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Comments

Ok, but how is it that bad monetary policy in the US is contributing to commodity inflation in Europe.

Isn't the thesis here that the FED has been to loose. The dollar has fallen. Commodities have risen and therefore we have inflation in energy and food.

Well, the Euro has been rising and they still have rising commodity prices.

Doesn't that lead credence to the view that commodity prices are being driven by demand in Asia and not by US monetary policy.

If so, how does it behoove the Fed to focus on commodity prices? Its my opinion that the Europeans really got themselves in a pickle when they set the mandate to the ECB to focus solely on price stability.

Its that "consistent with maximum employment" clause that steers the FED towards core inflation and indeed the US has lower unemployment and stronger long run growth.

Posted by: karl smith | Oct 4, 2007 12:58:42 PM