It All Makes Sense if You Don’t Have to Eat

It’s getting familiar: The Fed says inflation is low, but lots of things—the grocery bill, filling up the tank—cost a lot more than they used to.

Where’s the disconnect? As The Wall Street Journal explained today, while the Consumer Price Index last month rose 3.2% compared to a year ago, “so-called core prices, which strip out food and energy, rose by a more modest 1.3%, below the 1.5% to 2% range central bankers consider desirable.”

Photo source:

Hang on. Strip out food and energy? For many of us, that’s where a lot—if not most—of the money goes.

Economists have long had an answer to this, of course. Prices for food and energy fluctuate hugely, they say, so it’s foolish to base policy on them. If the cost of a gallon of gas surges from four bucks to five and back down to four over the course of a few weeks or even several months, that’s not a sign of much of anything significant for the long-term health of the economy (though, as we’ve noted, certain businesses may find themselves scrambling to manage the situation).

[EXPAND More]Yet some are starting to wonder whether rising food prices, in particular, are no longer “transitory”—a word favored by Federal Reserve Chairman Ben Bernanke. “One of the major reasons why food prices are rising is due to fast-growing Asian economies,” Daniel Indiviglionoted recently in The Atlantic. “That isn’t likely to be a temporary shock.” (We might add healthcare and higher education to the list of significant items where inflation seems unyielding.)

Of course, figuring out exactly what to measure is no easy thing. “Events to be measured must be significant in themselves . . . or they must be symptoms of at least potentially significant developments,” Peter Drucker wrote in his 1973 classic, Management: Tasks, Responsibilities, Practices. “Trivia should never be measured. One has control by controlling a few developments which can have significant impact on performance and results.”

What do you think: Is the Fed measuring the right things as it tries to keep inflation in check, or is it missing the boat by excluding food and energy from the mix?[/EXPAND]