"Commentary"-An AccurateTake on Inflation
Monday, July 02, 2007SUSIE GHARIB: Tonight's commentator asks the question: how accurate are the government's inflation figures? He's Bernard Baumohl, director of the Economic Outlook Group.
BERNARD BAUMOHL, DIRECTOR, ECONOMIC OUTLOOK GROUP: Is inflation really subsiding? The Federal Reserve says yes, but a visit to the supermarket, restaurant or gas station will tell you the cost of living is anything but subsiding. In fact, food inflation this year has been rising at the fastest pace in 15 years. And with oil hovering around $70 a barrel, gasoline prices have moved up as well. Clearly there's a growing disconnect between what consumers see and what the Federal Reserve views as inflation. The Fed conducts monetary policy based on how core inflation is behaving.
Core inflation tracks changes in consumer prices, but excludes that of food and energy because these two sectors are often influenced by short- term events like hurricanes or geopolitical tensions. The Fed doesn't want to set interest rates based on such temporary factors and rightly so. But these days, food and energy costs have been climbing because of fundamental changes in the two commodities.
For instance, corn, which has typically been used for food and feed stock, is being diverted to produce ethanol. That's caused the price of food staples linked to corn like meat and milk to skyrocket. Oil prices have jumped not as a result of short-lived events, but because global demand for crude is about to exceed production. Thus, the Fed's exclusion of food and energy may now be a mistake. It makes little sense to say core inflation is stabilizing, when Americans continue to lose purchasing power. I'm Bernard Baumohl.
