Monday, April 18, 2011

Thank You, Mr. Bullard

St. Louis Fed President James Bullard said today that the Federal Reserve should not exclude energy and food prices from the inflation numbers it targets.

Thank you, Mr. Bullard.  I have been taking that very position in this blog for years.  Here is one such article I wrote on January 28, 2011.  The Fed's core inflation target rate and especially how they calculate it borders on the indefensible.

The Fed does not count food and energy prices in its core inflation calculations.  The Fed correctly argues that the prices on these commodities are volatile, and therefore sharp swings up and down tend to skew the average.

But what the Fed does not realize is that part of inflation is psychological and that food and energy make up the two largest retail purchases most consumers make each and every day.  People buy cornflakes and milk, gasoline and heating oil, steak and potatoes.  All these necessities and many more have been skyrocketing in price lately.  Government officials telling the public there is no inflation when any trip to the gas station or supermarket shows you otherwise makes our elected servants look silly.  It's like the old Groucho Marx line when caught by his fiancee in bed with another woman:

"Who are you going to believe?  Me or your own eyes?"

The Fed needs to get real and start measuring the prices of things real people in the real world buy with real dollars they earned at real jobs, and not build models designed to make a failed expansionist monetary policy look more effective than it really is.