I have previously written at length about the shortcomings of the core inflation measures preferred by some central banks that conveniently ignore the highest growth expenditure classes. The WSJ touches on this theme again here when reviewing a Chicago Fed paper, co-authored by a dovish member of the FOMC, which contends that commodity price rises have no impact on core inflation. Yeah right. Note the crucial assumption about the central bank's credibility. I wonder how much credibility the Fed and the BoE have right now...The RBA's credibility is, as yet, in decent shape, although once it starts deteriorating, you find it is an awfully slippery slope:
"The paper’s focus on core inflation will likely irritate many observers who have long blanched at the Fed’s reliance on core inflation measurements. The Fed has long faced criticism for downplaying the impact of some of the most important prices consumers and businesses face on a daily basis. Fed officials have countered using core prices as a policy guide gives them a less volatile way to get a handle on inflation.
The paper argues one of the key reasons commodity prices don’t cause broader mischief is due to the fact the public has greater confidence the Fed will act appropriately. “Assuming there is a generally high degree of central bank credibility, there is no reason for such expectations to develop–in fact, in the post-Volcker period, there have been no signs that they typically do,” the paper said, referring to Paul Volcker, the legendary central banker who broke the back of inflation three decades ago.
The paper’s conclusion that oil prices are mainly a force to retard growth, as they sap consumers’ spending ability, is a familiar contention among central bankers."
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