While we're all counting down the hours until Olbermann returns, I thought I'd answer a question that keeps coming up. Why use Core Inflation (inflation less food and energy) when talking about inflation? Why not use "real" inflation?
After all, aren't energy and food both critical to how we live? And in the case of energy, isn't that price so important that we really need to be watching it?
Well, here's the answer, courtesy of the Professor. It turns out the "which chart to watch" problem isn't one of logic, but of smoothing the graph. By way of illustration, Krugman presents this chart:
And then he comments:
So, do you believe we faced runaway inflation in early 2008, which had turned into runaway deflation by the middle of 2009, then miraculously stabilized? I don’t; I think volatile prices were volatizing, but that underlying inflation was trending steadily downward.Something to stash away the next time the conversation turns to inflation; if you want to see real trends, remove the volatile element. It's not about the logic, it's about easier-to-read graphs.
More from Krugman on the usefulness of this measure here.
And now, back to the countdown ...
GP
