Quote:
Originally Posted by Lenny2
Core inflation doesn't measure food and energy, because the fed has no control over price stability in those sectors.
Those are things people can't live without and will buy no matter what the fed does. If a head of lettuce costs $10 there's nothing the fed can do to discourage people from buying it, they need it to survive.
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Some years back, then Fed Chairman Alan Greenspan began making public noises about how the CPI overstated inflation. Where the fixed-basket of goods approach would measure the cost of steak, year after year, Mr. Greenspan argued that if steak went up in price, people would buy more hamburger meat, mitigating the increase in their cost of living. The fact that switching the CPI concept to a substitution-based basket of market goods from a fixed-basket violated the original intent, purpose and concept of the CPI, never seemed to be a concern to those in Washington. Artificially reducing reported CPI inflation would have a variety of benefits, beginning with reduction of the budget deficit due to the cutting of cost-of-living adjustments for Social Security payments.
Accordingly, geometric weighting was introduced to the CPI reporting methodology, which had the effect of mimicking a substitution basis. Since the revised CPI still did not show as low an inflation rate as a fully substitution-based index would, Mr. Greenspan began focusing the Fed's inflation targeting and measurement on the inflation rate used to deflate personal consumption expenditure (PCE) in the GDP. Such was a substitution-based measure.
More recently, the BLS introduced the Chained CPI-U (C-CPI-U) as an experimental substitution-based inflation index, which closes follows PCE inflation.
Yet, as oil prices began their current uptrend, substitution-based inflation reporting still was not low enough for the former Fed Chairman, as he began embracing the concept of "core" inflation, inflation net of food and energy price changes. Eliminating bothersome price increases in energy and food products -- such as seen with oil at present -- would make the Fed's job of containing reported inflation all the easier.
In general, if a government economic measure does match common public experience, it has little use outside of academia or the spin-doctoring rooms of the Fed and Wall Street. The two SGS measures included in the above table have gimmicked methodological changes removed from the reporting so as to reflect more accurately the common public experience as embodied by the post-World War II CPI.
from:
http://www.shadowstats.com/cgi-bin/sgs/data