Paul Krugman continues to explain that “core” price indexes (without volatile food and energy prices) are a better inflation indicator than “headline” price indexes. This was, it seems to me, an uncontroversial issue until the world configured itself such that a focus on headline prices would justify monetary tightening under circumstances when all other indicators point to looser money. The idea of apolitical monetary policy has collapsed under conditions of unilateral disarmament by the left and politics is pushing toward higher rates.
But for the record, Krugman gives us David Altig’s demonstration that backward-looking headline inflation is a poor predictor of future inflation compared to the core number:
But for those who really want to wonk out, my question is this. If we want a prediction, why not look at a prediction? The Cleveland Fed publishes these market measures of inflation expectations:
It’s not perfect, but it’s actually about the future. What’s more, if people knew that the Fed was trying to target market expectations at a specific level, then the sensible think for market actors to do would be to expect that expectations will converge at the target. And if people expect expectations to converge to the target, then expectations should in fact converge at the target. This would make Fed minutes a lot less interesting to read since there’d be less to argue about. But by the same token, the system would actually work better and we wouldn’t have to fight these issues out on blogs and op-eds.