Headline, core or even more? The choice of inflation measures is not just a discussion topic for economic policy nerds. A bad index will lead monetary policymakers dangerously astray. Lorenzo Bini Smaghi, who sits on the board of the European Central Bank, said in the Financial Times on Thursday that core measures (which exclude food and energy prices) are inadequate. He is right but does not go far enough.
No price index can be considered absolutely true; there are many plausible ways to select and put together the goods and services to measure. But different approaches can be more or less useful for different purposes. For central bankers, the goal is to find a measure that identifies those systematic distortions in prices that monetary policy might be causing or can potentially address.
Core inflation supposedly focuses on what monetary policy can achieve by excluding temporary, although often dramatic, changes in commodity prices. But, as Mr Bini Smaghi points out, headline inflation has long been consistently higher than core because commodity prices have mostly moved upwards. It seems that buyers have had enough money, the ultimate source for all inflation, to pay for commodities without paying less for other stuff. That matters: high raw material prices hurt poor consumers, stoke wage demands and create disruptive profits for producers. Commodity inflation might be a better global index of policy-induced economic stress than either headline or core.