|Are economists causing unnecessary confusion by talking about two different rates of inflation, the “headline rate” and “core inflation”?
Since the midyear economic forecast on April 29th when I mentioned in passing my wife’s comment about “real” inflation being high, several people have commented in agreement with that sentiment. The lead story in the Economist last week was on inflation. People say they have felt for over a year that things have started to cost more, such as typical groceries that a household buys. The reported inflation rates of two to three percent in the past year appear to be inconsistent with the real experience.
To make matters worse, my son joined the debate over dinner last night. This budding engineer/financial analyst opined that the policymakers themselves may be failing in properly fine-tuning monetary policy if they are not clear about which of the two rates is the correct one to use to gauge the health of the economy.
Unlike the headline rate that measures overall inflation, core rate removes from calculations the changes in food and energy prices because these are often more volatile. The idea behind looking at the core rate is that it measures the extent to which inflation is “sticking.” If inflationary expectations have permeated the economy in sectors other than food and energy, then the concern is heightened as these could start pushing wages up which could lead to an inflationary spiral.
That makes me wonder to what extent the collapse in the consumer confidence is due to the confusion over inflation and the psychological feeling people have that things are much worse than the official data on inflation and unemployment rate indicate. What can economists do to keep things clear and understandable?