Inflation Is Down For The Count But Which Count?

Which inflation measure do you trust: the consumer price index or "core" inflation, which excludes food and energy prices from the CPI? Most economists favor the core concept because food and energy prices can be highly volatile on a month-to-month basis or even for a year or two. In their view, core prices are a better guide to the long-term basic inflationary trend.

Economist Susan M. Hering of Salomon Brothers Inc. thinks total consumer inflation deserves greater attention these days, however. She notes that the concept of core inflation was developed during the 1970s, when prices of food and energy gyrated wildly, and economists and investors were determined to discount what they believed were temporary upsurges in the CPI.

Since 1980, by contrast, such episodes have been rarer as food prices have slowed in the wake of rising output and energy prices have escaped the tyranny of opec. Thus, the rationale for ignoring prices of food and energy, which account for 25% of consumer spending, seems less convincing. Indeed, even though core inflation in August was up only 3.5% from August, 1991, the full CPI was up a mere 3.1%. And the latter, says Hering, may now be a better guide to basic inflationary trends.

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