Reply #12: bonddad - Fed Reserve: Making A Huge Mistake With Inflation

[DemReadingDU]

Regarding inflation, the Fed focuses on core rather than total inflation.

Core inflation is inflation less food and energy. The central idea to targeting core inflation is sound. Food and energy prices are far more volatile than core prices. Because of this volatility, food and energy prices could skew inflation higher during a shorter-term volatile price period (say 3-6 months), thereby misrepresenting the actual inflation picture. However, suppose the economy had a prolonged period of energy and food price inflation that was not seasonal, but instead was part of a longer term trend of increasing prices. Then focusing on core prices would misrepresent the underlying inflation picture by stating that inflation was too low. This is exactly the situation going on right now in the US economy. Food and energy prices are increasing at higher rates than core inflation. But the Fed is not looking at these areas of increasing prices when they set interest rate policy. As a result, the Fed is letting daily expenses of food and energy eat away at the small pay gains for most Americans.

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http://www.dailykos.com/story/2007/7/16/74122/4345