ECB on Core Inflation

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!

Download IMF_white_paper.pdf


Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
ECB Press conference, Vienna, 4 October 2007

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What's been said:

Discussions found on the web:
  1. karl smith commented on Oct 4

    Ok, but how is it that bad monetary policy in the US is contributing to commodity inflation in Europe.

    Isn’t the thesis here that the FED has been to loose. The dollar has fallen. Commodities have risen and therefore we have inflation in energy and food.

    Well, the Euro has been rising and they still have rising commodity prices.

    Doesn’t that lead credence to the view that commodity prices are being driven by demand in Asia and not by US monetary policy.

    If so, how does it behoove the Fed to focus on commodity prices? Its my opinion that the Europeans really got themselves in a pickle when they set the mandate to the ECB to focus solely on price stability.

    Its that “consistent with maximum employment” clause that steers the FED towards core inflation and indeed the US has lower unemployment and stronger long run growth.

  2. Steve commented on Oct 4

    Japan has rising commodity prices, too. I guess they must have high inflation.

  3. Fullcarry commented on Oct 4

    When returns on money are negative people hoard commodities. Somehow the lessons of the past have been lost.

  4. UrbanDigs commented on Oct 4

    Europe is also growing at a faster rate than the US and experiencing appreciation in currency as a result. Comparing what ECB said to why our fed chooses to ignore Headline datasets Im not sure relates all that well. Our economy may require a different approach in inflation monitoring since we are way more mature and growing at a much slower pace than Europe.

    With that said, I think its riduclous that the fed doesnt pay more attention to the headline number. It seems many of our inflation metrics are flawed.

  5. Winston Munn commented on Oct 4

    When a general awakening occurs that paper money is falling in value, there is a rush to convert cash to hard assets – if it gets bad enough, any old asset will do.

    Or as Mises called it, the crack-up boom.

  6. Unsympathetic commented on Oct 4

    BR: Next time you’re on a TV show, could you ask the next imbecilic shill who claims to want to “help homeowners” .. when he’ll be cutting property tax dollars that inflated during the price run-up?

    The way this whole thing affects all of us is in the gratuitously high property tax rates generated from increases in property value .. which will then be used to pay for whatever inane bailout scheme-du-jour they’re talking about.

    As for the thread’s focus, I believe most of the food inflation has come because of the subsidy on ethanol and the peak oil scenario. The demand for ethanol makes all other foodstuffs more expensive.. add in $80/barrel and everything’s climbing up. Of course, ignoring peak oil is beyond crazy.

  7. Fred commented on Oct 4

    What will falling home prices and rental rates do for your inflation expectations Barry?

    I agree with Unsympathetic that ethanol has been the root of food inflation. This has been one shockingly brain dead idea. One of many from Bush, I’m afraid.

  8. Estragon commented on Oct 4


    I’m becoming more and more convinced that Fedspeakers are out to manage expectations more than to shed light on what they’re actually up to.

    Anyway, a couple of nuggets from Fisher’s talk:

    First, some black humour…

    Other items trimmed out in August included guns and ammunition, which fell in price significantly, and funeral expenses, which increased in price. I’ll let you decide for yourself if the two price swings were related, but I will tell you that we have had to trim both of those items before because their prices moved the same way.

    Not sure about this one though…

    Indeed, there are macroeconomic models suggesting that if wages are stickier than prices, a central bank would do well to focus on an index of wages rather than prices. I just can’t imagine central bankers lasting very long in their jobs if they continually announced to the public their desire to hold down wage growth.


  9. UrbanDigs commented on Oct 4

    The CPI makeup has a rental component that is made up of data collected from about 50,000 landlords and tenants.

    If rental rates decline, it will obviously have some effect on CPI to the downside. However, one should look at the effect on CPI rents had when rates were rising first to see what kind of relationship may or may not exist.

  10. Estragon commented on Oct 4


    I agree that (US, corn-based) ethanol is a shockingly brain-dead idea, but not that it’s at the root of the food price increases. That’s far more likely to be a result of the trading up of calorie sources to meat in emerging markets.

  11. shrek commented on Oct 4

    I love the ethanol bashers. It doesnt explain why everything is going up in price. Stocks, bonds, ags, oil. etc. Yeah, its the ethanol.
    Interest rates are too f’ing low everywhere.

  12. Eclectic commented on Oct 4

    Barringo, I’d hoped to drop this on Storm, but he’s laid off the ex-deb Fed business lately, so… I hate to let it go to waste:

    There’s enough there for you and Jean Claude to both work with.

    Fred, right on the ethanol.

    Estragon, it’s the calorie intake of assbig SUVs runnin’ up and down ‘Merka at 80 mph that you’re really referring to… and the temporary insanity of failed recognition that corn for ethanol is D.O.A. from an efficiency standpoint. It’s a net negative to energy production.

  13. Fred commented on Oct 4

    Shrek…not sure if you’re a tequila drinker, but Mexican farmers are plowing under aged Agave plants to make room to plant corn for ethanol. These plants have to be +7 years old to produce the nector booze. Brilliant!

    Long Blue Agave

    Short Washington

  14. Justin commented on Oct 4

    Estragon, your kidding right? Agricultural commodities are in lock-step with the increase in ethonal demand. This, “trading up of calorie sources to meat in emerging markets,” is bogus. You think the Chinese are going to give up their dog meat for beef? lol

  15. Fred commented on Oct 4

    You want to see oil prices collapse, and set the Gulf States on their collective arses?

    Have the goverment start a legitimate contest:

    $25 million dollars for the best “fuel free” engine platform. Give incentives for this technology to be implimented in vehicles, on an accelerated basis.
    We need a new Manhattan Project.

    This could solve many global problems in a hurry.

  16. Fullcarry commented on Oct 4

    Lets say you thought the Dollar was getting devalued. What kind of signs would you look for?

    Could this be a partial list:

    – Ever increasing trade deficits.
    – Ever increasing exchange rate of foreign currencies.
    – Ever increasing commodity prices.
    – Ever increasing speculation in all kinds of assets.
    – Ever increasing class of leveraged players (think hedge funds).

    and so on.

  17. Dave commented on Oct 4

    It seems this gentleman thinks you should be writing academic papers to substantiate your opinion.

  18. Estragon commented on Oct 4


    I entirely agree with you that on current trends, ethanol production will impact food prices. Absent some significant way of increasing yields or arable land, the impact is likely to be huge.

    The past increase in food price though, is a consequence of rising food and feed demand worldwide unmatched by rising production. It’s also worth noting that food has historically been a significant target of trade protectionism, and that’s probably contributing to the supply/demand mismatches.

  19. Eclectic commented on Oct 4

    Pradeep Bonde. That’s a great name!

    Your name sounds like one of my fictional characters. I may have to work you into the lexicon.

    For example: How Pra-deep can my sweet Bondie (not you PB) go:

  20. me commented on Oct 4

    “It seems this gentleman thinks you should be writing academic papers to substantiate your opinion.”

    Did you ever notice that those guys that publish in those journals are never responsible for any money and accountable to no one (tenure).

    Real people facing real losses have a more practical take than some mathematical formula in a journal. They spent years in the journals drawing partial derivatives to “prove” what we already knew.

    I guess my question for the journal crowd is how do I make money pretending inflation is 2 percent?

    This is the same crowd that told us how many jobs would be created by experting our jobs and here it is, years later and we are still waiting for jobs to be created, other than waitresses, bartenders, and real estate agents.

  21. GreenMachine commented on Oct 4

    Fred, any publicly traded companies you know of grow Blue Agave?

    I don’t foresee DEO or FO having a problem passing on higher costs.

    As for ethanol, it is part of our fuel and energy solution. There’s no need for a Manhattan Project; companies are already doing this. HMC has already developed a Hydrogen Fuel Cell vehicle; APD looks well positioned. The Chevy Volt is just around the corner; SQM also looks great. If we could get beyond ethanol from corn and ramp up implementation of ethanol from municipal solid waste (recycling yard clippings, etc.) we would see a huge benefit to our landfills and energy needs. Long BFRE.OB

  22. Justin commented on Oct 4

    Fred, your idea seems very interesting to me. Whatever happened to great thoughts like: “We have it in our power to begin the world over again.”

    Thomas Paine

  23. Unsympathetic commented on Oct 4


    Stock and bond prices have nothing to do with inflation. I quite clearly pointed out that peak oil is a different scenario which has happened to correlate with ethanol. Correlation does not mean causation.

    Fewer acres planted with corn means lowered corn supply for the same demand. The increase in corn prices means less feed for livestock. Cattle weight is down 10-20% from last year. Prices for meat are therefore up. How far down the chain do we need to go to show why ethanol leads directly (not indirectly) to agriculture inflation across-the-board? QED.

  24. stormrunner commented on Oct 4

    The markets appear to be rising in knee jerk reaction due to expectation of monetary inflation usually consistent with rate cuts, seems all where getting is price inflation.

    Eclectic it would seem that maybe the FED is acting accomadative in the public view while remaining restrictive in practice,

    “First by inflation then by deflation….

    Now I’ll take that dung ball, is this guy all wet or is he on to something.

    As for liquidity, the Federal Reserve System has expanded the monetary base by less than 2% per annum ever since Bernanke took over in February, 2006. By Greenspan’s standards, this is a policy of tight money. It is disinflationary.

    Amazingly, investors pay little attention to this statistic. They assume from the headlines about the lower federal funds rate that the Federal Open Market Committee is expanding the money supply rapidly, which is not the case. It may be preparing to do this, but as yet, this has not happened.

  25. wunsacon commented on Oct 4

    Why does anyone need or want the federal government to set a prize for a clean or efficient engine? I don’t, because:
    – That’s what VC’s are for.
    – Higher energy prices will spur innovation.

    I wish the government would refrain from tinkering. They should:
    – Set energy taxes as a percentage of the nominal price (instead of absolute prices which have to be re-legislated every few years).
    – Set greenhouse gas limits, issue pollution credits to the public, and let us citizens auction them as we see fit.

    The executive and legislative branches can then spend more time fixing other problems which require their attention.

  26. wunsacon commented on Oct 4

    For example, the government mandate of ethanol most likely had these two overlooked side-effects:
    – *Some* people and capital moved away from “let’s come up with a better engine or fuel” to “let’s figure out how to grow/process corn better”.
    – Discussion of ethanol partially preempted more productive debate about other energy choices.

  27. Justin commented on Oct 4

    I have heard a few people on here state that agricultural commodity inflation is all demand driven; not true. There have been several crop failures do to inclement weather all over the world. The Aussies are having drought, likewise South Americans.

  28. UrbanDigs commented on Oct 4

    ethanol is either NOT the answer, or YEARS from being economically feasible as an alt energy.

    Plain and simple. I think we need to open our minds to more creative ways to make energy use more efficient.

  29. Stuart commented on Oct 4

    This is either the height of contempt for the investor or world class chutzpah, or both. From the twilight zone I present:

    In a new research report entitled “Leveraging CLO illiquidity premia”, JP Morgan says that the combination of historically wide CLO liability spreads and near-zero default rates makes this an optimal time for buy-and-hold investors to consider investing in CLOs-squared. It says this is a way to efficiently monetise the current illiquidity created in the “spread rout of 2007”.

  30. Justin commented on Oct 5

    Stuart, I am not at all well versed in the clo area, but doesn’t this make sense, given that the FED has just added to the moral hazard problem. We are either living in the best of times or the worse of times, Bernanke and the OMC, hopefully are watching the clock fairly close so that they can rein this all in on time? My guess is that the “tick-tock” has a big bang on the end of it.

  31. Eclectic commented on Oct 5

    I am personally heartbroken that you aren’t playing “Over Or Under.”

    What a-r-e we?…

    … Wimps!

    That’s exactly what we are, and proud of it!… especially after that somewhat inconclusive ADP.

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