Wow, turns out we were pretty timely with our response this morning.
This morning, the ECB chief noted that the "risks to the outlook for growth are judged to lie on the
No surprise there. But what really caught my was what Jean-Claude Trichet, President of the ECB, had to say about "core" inflation:
"As regards price developments, according to Eurostat’s flash estimate, the
annual HICP inflation rate increased strongly to 2.1% in September 2007, from
1.7% in August. As we have already indicated on previous occasions, we are now
entering a period during which unfavourable effects from energy prices will have
a strong impact on annual HICP inflation rates. Owing mainly to such effects, as
a result of the marked decline in energy prices a year ago combined with the
recent substantial increase in oil prices, we expect the inflation rate to
remain significantly above 2% in the remaining months of 2007 and in early 2008,
before moderating again. Largely as a consequence of capacity constraints and
relatively tight labour market conditions, inflation is expected to be around 2%
on average in 2008.
Risks to the outlook for price developments remain on the upside. They
continue to include the possibility of further increases in the prices of oil
and agricultural products as well as additional increases in administered prices
and indirect taxes beyond those announced thus far. Taking into account the
existence of capacity constraints, the favourable momentum of real GDP growth
observed over the past few quarters and the positive signs from labour markets,
stronger than currently expected wage developments may occur, and an increase in
the pricing power in market segments with low competition could materialise.
Such developments would pose upward risks to price stability. It is therefore
crucial that all parties concerned meet their responsibilities." (emphasis added)
In other words, the non-core inflation level is rising, its significant, and its a threat to price stability. Focus too much on the Core to your own economy’s detriment . . .
UPDATE: October 4, 2007 5:10pm
Singer suggested posting this IMF White paper on the Core inflation rate.
The IMF describes the paper thusly:
This paper provides an overview of statistical measurement issues relating to alternative measures of core inflation, and the criteria for choosing among them. The approaches to measurement considered include exclusion-based methods, imputation methods, limited influence estimators, reweighting, and economic modeling. Criteria for judging which approach to use include credibility, control, deviations from a smoothed reference series, volatility, predictive ability, causality and cointegration tests, and correlation with money supply. Country practice can differ in how the approaches are implemented and how their appropriateness is assessed. There is little consistency in the results of country studies to readily suggest guidelines on accepted methods.
For those of you (especially on the prior post) who prefer a more formal or academic approach to critiquing inflation, have at it!
Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
ECB Press conference, Vienna, 4 October 2007