From an economist's point of view, the "core" rate counts more than the "headline." But the Fed will have to pay attention to bothIf there's one thing Americans don't like, it's a cheater. And as far as many people are concerned, it's cheating to calculate the rate of inflation by deliberately excluding soaring food and energy prices. After all, the logic goes, we all have to pay for food and energy, so why ignore it when measuring inflation? Is this some kind of conspiracy to ignore the plight of the poor or to make the economy look healthier than it really is?
Actually, there are two strong arguments for ignoring food and energy prices in setting monetary policy. Even if you don't agree with them, it's probably a good idea to understand what they are—if only to prepare yourself for the next barbershop debate over why everything's so expensive these days.
The debate over "headlline" inflation (which includes everything) and "core" inflation (which excludes food and energy) heated up on June 13 after the Bureau of Labor Statistics reported a 0.6% increase in May in the headline rate but only a 0.2% increase in the core rate, seasonally adjusted. Over the past three months, headline prices have grown at a 4.9% annual rate, while core prices have risen at an annual rate of just 1.8%.
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