Friday, January 4, 2008

When is Inflation Considered Inflation?

So they always separate "core" versus "nominal" inflation. The reason they do this is that two items (energy and food) are very volatile and can easily over or understate the "true" rate of inflation.

Normally the Fed and other economy watchers are only concerned about the core rate as they should be. However, the past five years or so the price of energy and food has consistently been higher than the "core" rate of inflation. And while energy and food are volatile, being persistently higher than the "core" rate, to the extent of five years makes me wonder if it really matters if you separate it out from "core" inflation. People still have to pay for gas. People still have to pay for food. And the more it costs, the lower standards of living are.

In any case the chart below shows nominal versus core inflation. Bar the last quarter you'll see nominal inflation consistently exceeding core inflation.

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