Tuesday, May 24, 2011

Whoa, St Louis Fed Prez Says Ditch Core Inflation

Federal Reserve Bank of St. Louis President James Bullard delivered remarks titled “Commodity Prices, Inflation Targeting, and U.S. Monetary Policy” on Monday as part of the Cozean Lecture Series, overseen by the Mineral Area College Foundation.

In his remarks, he said ignoring energy prices in measures of inflation may understate the true inflation rate if rising energy prices represent a relative price shift for energy. In addition, he discussed headline and core inflation and stressed that the key policy goal with respect to prices is headline inflation rather than core. He also said that the Federal Open Market Committee “should de-emphasize core inflation in order to reconnect with households and businesses that experience important price changes every day.”

So called, "Headline Inflation", which should be known as "Common Man's Inflation", includes food prices and energy prices as part of the index. Inspired by Tricky Dick Nixon, food and energy prices were removed from the index and a new index created, this trimmed down index became known as "Core Inflation".  It should be known as "Elitist Inflation", since food and energy are only a small part of the budget of elitists, while food and energy are a significant part of the budget of the common man.

It appears that Bullard gets this. The price inflation index of the common man is what the Fed should focus on and not the price inflation of elitists, who have different budgets and get newly printed Fed money before prices go up. Kudos to Bullard.

I hasten to add that when I say the Fed should focus on "Common Man's Inflation", I do not mean the Fed should somehow target "Common Man's Inflation", when it decides a target for price inflation. I simply mean "Common Man's Inflation" is a more honest reading of inflation.

As far as I am concerned, the Fed has no correct economic theory which justifies increasing the money supply be even one penny. And when it does increase the money supply, it simply distorts the economy in favor of those who receive the money first.

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