Cold and Hungry

The Fed often gets roasted for excluding food and energy in its policy discussions about inflation. Is this fair?

Of all the Fed’s comments, one of the most irritating is their focus on “core” inflation, excluding food and energy. Don’t these folks eat or drive?

It’s not accurate to say that food and energy make up a small portion of consumer budgets. The Cleveland Fed recently studied this. They found that median households spend 17% of their budget on food and energy, and the poorest fifth spend about 20% on these items. Clearly this is a significant amount.

So why does the Fed cut them out? It has to do with forecasts. Over time, the best forecaster of overall inflation is core inflation. And the Fed tries to use data that look forward rather than backward.

Still, it’s irritating for them to discuss an inflation measure that excludes something we spend one fifth of our money on. So they’ve recently changed their terms: instead of core inflation, they’re now talking about medium-term inflation. The measurement is the same; only the label has changed.

But I don’t think it will help. Shakespeare asked, what’s in a name. He concluded, not much. You can’t make people happy by re-labeling what upsets them.

Douglas R. Tengdin, CFA
Chief Investment Officer
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