Energy and food removed from inflation measure – THIS IS NOT A CONSPIRACY

Yes, energy and food are removed from the measure of ‘core’ inflation.

The reason for their removal is because of their volatility (they go up and down a lot).

The inflation measure is a key data input into monetary policy decision-making. Inputting volatile data into the decision-making process can cause whipsaws in policy, which is not a good thing.

Anecdotal evidence. A few weeks ago I was paying $4.95 a kilo for pumpkin. This week I paid 74 cents a kilo. That’s volatility. If Glenn Stevens (head of the central bank here in Australia) jacked up interest rates on the basis of such data, and then cut rates a few weeks later, well, that would be just silly, wouldn’t it? Fortunately, Glenn Stevens doesn’t listen to the conspiracy theorists, axe-grinders, and political hacks. He is much smarter than that.

A pertinent quote from an intelligently-written, sensible economics blog. Well worth reading. (Quote refers to US inflation).

Some critics will argue anew that core CPI is misleading because it strips out food and energy prices. No matter that the economic logic for doing so is compelling to avoid getting whipsawed with price signals via volatile commodity prices.

Conspiracy theories, and their earnest victim-mentality promoters, those who pursue questions such as: Is Lady Gaga a man? Is Bin-Laden dead? Were the moon landings faked? should be categorised as people worthy of our pity, but also nevertheless funny to listen to. They should also be kept as far away as possible from policy decisions and decisions affecting your trading/investment.

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