If you look at price increases over the past year, overall inflation has come down a lot, but much of that reflects falling gasoline prices, so the traditional measure of core inflation, which doesn’t include those gas price cuts, has barely fallen at all.
To see why, it’s helpful to know something about the history of why we typically talk about two different measures of inflation.
Inflation caused by, say, a spike in oil prices tends to be easy come, easy go, but inflation driven by, say, rising wages tends to have a lot of inertia and be hard to bring down.
Or to put it another way, a measure that excluded more volatile prices could help extract the signal from the noise.
The Fed, however, kept calm and carried on, because core inflation remained subdued — and the Fed was right.
Persons:
Robert Gordon, debasing
Organizations:
Federal Reserve