Well, everyone is relieved now after today´s inflation report. Sure, the CPI rose 0,6% over the last month and 3,1% over the last year, both the highest number for years, but this number seem irrelevant. The core index rose only 0,2% m/m and 1,7% y/y so inflation is “really” under control so the Fed will now most likely only raise interest rates with 25 basis points at their next meeting. This reaction reminds me of Murray Rothbard´s excellent article on the issue of the “core” index. In addition to Rothbard´s excellent critique it could be added that it is rather strange to exclude food prices. The official motive for looking at the core index is the strong volatilty of energy prices, but the total food price index (As opposed to some individual food price items) has not been more volatile than many “core” indexes.
Source link: http://blog.mises.org/2126/core-hoax/
Core hoax
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I think that, similar to EBITDA (“earnings before bad news”), the government could go one step further and construct a “CPI-BITDA”, a sort of “CPI before bad news”, composed only of the items that increase the least in any given month.
They do that often. Whenever the “core” index rise more than normal then they “explain” that this was due to a “spike” in tobacco prices, airfares or whatever and so there is supposedly no “real” inflation threat since excluding the fastest increasing prices core prices do not rise very much.
Another point that should be made on this issue is that if there is a supply driven increase in any particular price then this will reduce purchasing power and in turn decrease any “core” price pressure. This means that the “core” index will systematically underestimate overall swings in price pressure.
It is only a matter of time when the only non-excluded category from the government CPI will be electronics:
“The core rate of inflation continues to run at -40% per year as measured in MIPS/$ and MBits/$, as it has for the last decade.
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