Erik points us to this fascinating history of the core rate of inflation (aka Inflation ex-inflation), via the Economist:
"Stephen Roach, the chief economist at Morgan Stanley, worked at the Fed in the 1970s under the then chairman, Arthur Burns. When oil prices surged in 1973-74, Burns asked the Fed’s economists to strip out energy from the consumer-price index (CPI) to get a less distorted measure. When food prices then rose sharply, they stripped those out too—followed by used cars, children’s toys, jewellery, housing and so on, until around half the CPI basket was excluded because it was supposedly ‘distorted’ by exogenous forces."
"As a result, the Fed failed to spot the breadth of emerging inflationary pressures throughout the economy. It looks unlikely to make the same mistake this time . . . Prices took off in the 1970s largely because of serious policy errors. Policymakers now understand that rising inflation harms growth, and independent central banks are more likely to stamp on inflation swiftly."
"The real worry with rising inflation expectations is less that they herald a surge in inflation than that they will limit the ability of the Fed or other central banks to cut interest rates if growth stumbles. It is commonly argued in America that if the housing bubble were to burst, and falling house prices threatened to choke consumer spending, the Fed would slash interest rates to prop up the economy, as it did after the stockmarket bubble popped in 2001-02. But then inflation was falling. Today, with inflation rising, the Fed would no longer have that option. If the economy hits trouble, investors and homebuyers should not expect to be bailed out again."
History may not repeat precisely, but it sure does rhyme . . .
A nasty whiff of inflation
Global monetary policy
The Economist, Sep 22nd 2005