Hardcore

Barry Ritholtz has long been hard on the folks who have a blinkered look at inflation, not seeing it for the trees. As he explains it, focusing on core inflation rather on the headline number is simply looking at "inflation ex-inflation". If you take the inflationary numbers out of the inflation data, you get no official inflation. I like to think of it as eXeXeX rated inflation: dirty fantasy.

Irwin Kellner at MarketWatch plays the same tune in his commentary, "Consumers feel all inflation, not just the core number":

For about 35 years -- following the lead of Arthur Burns, the then-chairman of the Federal Reserve -- whenever the inflation figures were released, economists both in and out of government routinely removed prices of food and energy in order to uncover the "core," or underlying, rate of inflation.

This exercise seemed reasonable for a while, since both food and energy prices are volatile. They rise and fall for reasons having little or nothing to do with the state of the economy -- not to mention the posture of monetary and fiscal policy.

Food and energy together account for over 25% of consumers' spending. Since both are necessities, when their prices rise sharply, it drains buying power that people might spend on other goods and services.

Soaring food and energy prices are the reason why consumer confidence is sliding, and why retail sales, excluding the effects of higher gasoline prices (which push up their dollar value) are softer than merchants had expected, thus causing retail inventories to rise.

Another point worth noting is that since food and energy are purchased literally every day, when their prices jump, it heightens people's awareness of inflation and causes them to factor it into the decisions they make -- including their wage demands.

One financial writer at a major newspaper wrote the other day that prices at the wholesale level were flat in March. He was misled because he looked at this index excluding food and energy.

However, the financial markets aren't fooled. They've boosted yields on the 10-year Treasury over the last couple of weeks. Even more important, the Treasury-TIPS spread has jumped sharply since the beginning of this year.

When this spread goes up, it means that investors are buying Treasury Inflation Protected Securities to protect themselves against inflation.

This spread is now at its highest point since the middle of 2006 - when the Fed was still raising interest rates.

Remember that when you read that today's US CPI figure was "flat", suggesting tame inflation and no pressure on the Fed to raise rates. Actually, core CPI was flat. Real CPI was up 0.6% on the month, which is WAY up on an annualized basis.