Thursday, November 15, 2007

Has The Fed Ditched Core Inflation?

Hat Tip to Larry Kudlow on this one

From Bernanke's speech yesterday:

Ultimately, households and businesses care about the overall, or "headline," rate of inflation; therefore, the FOMC should refer to an overall inflation rate when evaluating whether the Committee has met its mandated objectives over the long run. For that reason, the Committee has decided to publish projections for overall inflation as well as core inflation. In its policy statements and elsewhere, the Committee makes frequent reference to core inflation because, in light of the volatility of food and energy prices, core inflation can be a useful short-run indicator of the underlying trend in inflation. However, at longer horizons, where monetary policy has the greatest control over inflation, the overall inflation rate is the appropriate gauge of whether inflation is at a rate consistent with the dual mandate.

While I'd like to take credit for this with all of my kvetching about "core inflation", I tend to think Ben doesn't read my a whole lot.

There is a bit of confusion about when the Fed would use core and headline inflation -- as in what is the difference between long and short run.

It also leads to a very interesting question. The chart a few posts below shows the year over year headlines inflation number is clearly increasing. Does that mean the Fed will now start raising rates in response to that long-term trend?