Food Prices Up

Food prices are jumping up and bringing the overall CPI up with them. The New York Times coverage implies that this means we should be less worried about deflation, but I’m not so sure.

Normally, in terms of setting interest rate policy the Fed focuses on the “core” rate which excludes food and energy prices. They do that because food and energy prices tend to jump around quite a bit in response to events in a way that’s not closely tied to the overall price level and macroeconomic condition. But of course the fact that food and energy aren’t part of “core” inflation doesn’t mean they aren’t real, or don’t matter to people’s lives. Now we’re in a situation where the core inflation rate remains dangerously low, meaning we still need to worry about deflation, but it’s also a situation in which food and oil prices are rising. That’s a lot of hardship for consumers, and it could do a lot to strangle recovery in the crib.