by Bill McBride on 2/26/2015 08:13:00 PM
Thursday, February 26, 2015
[T]he idea of core inflation. Why do we need such a concept, and how should it be measured?Friday:
So: core inflation is usually measured by taking food and energy out of the price index; but there are alternative measures, like trimmed-mean and median inflation, which are getting increasing attention.
And people who say things like “That’s a stupid concept — people have to spend money on food and gas, so they should be in your inflation measures” are missing the point. Core inflation isn’t supposed to measure the cost of living, it’s supposed to measure something else: inflation inertia.
Think about it this way. Some prices in the economy fluctuate all the time in the face of supply and demand; food and fuel are the obvious examples. Many prices, however, don’t fluctuate this way — they’re set by oligopolistic firms, or negotiated in long-term contracts, so they’re only revised at intervals ranging from months to years. Many wages are set the same way.
The key thing about these less flexible prices — the insight that got Ned Phelps his Nobel — is that because they aren’t revised very often, they’re set with future inflation in mind. Suppose that I’m setting my price for the next year, and that I expect the overall level of prices — including things like the average price of competing goods — to rise 10 percent over the course of the year. Then I’m probably going to set my price about 5 percent higher than I would if I were only taking current conditions into account.
And that’s not the whole story: because temporarily fixed prices are only revised at intervals, their resets often involve catchup. ...
The standard measure tries to do this by excluding the obviously non-inertial prices: food and energy. But are they the whole story? Of course not ... Hence the growing preference among many economists for measures like medians and trimmed means, which exclude prices that move by a lot in any given month, presumably therefore isolating the prices that move sluggishly, which is what we want.
• At 8:30 AM ET, Gross Domestic Product, 4th quarter 2014 (second estimate). The consensus is that real GDP increased 2.1% annualized in Q4, down from the advance estimate of 2.6%.
• Also at 9:45 AM, the Chicago Purchasing Managers Index for February. The consensus is for a reading of 58.3, down from 59.4 in January.
• At 10:00 AM: University of Michigan's Consumer sentiment index (final for February). The consensus is for a reading of 94.0, up from the preliminary reading of 93.6, but down from the December reading of 98.1.
• Also at 10:00 AM, the Pending Home Sales Index for January. The consensus is for a 2.0% increase in the index.
• At 1:30 PM: Speech, Fed Vice Chairman Stanley Fischer, Conducting Monetary Policy with a Large Balance Sheet, At the 2015 U.S. Monetary Policy Forum, New York, New York
Posted by Bill McBride on 2/26/2015 08:13:00 PM