A gifted article on “Core Inflation”


Paul Krugman has been on “Team Transitory” from the beginning. Every article is biased toward minimizing the very real problem of inflation. His newest article boils down to “if the standard inflation measures show a higher inflation than you want to see, eliminate the data points that are driving the rise.” If core inflation (inflation minus food and energy) is coming in too high, try “super-core” which eliminates housing.

Sorry, most people need food, shelter and energy.

I read everything that Krugman writes but I always keep his bias in mind. As an investor, I’m most interested in CPI because that’s the inflation adjustment for my TIPS and I-Bonds.


So “core inflation” which omits energy and food is a bad measure? Then why do you keep insisting on using it?

He has admitted (multiple times) that inflation has persisted longer than he thought it would. He has also written that there’s no “magic” in the 2% number you keep saying the Fed says, which is true. In fact, the past decade was an outlier, the inflation rate has almost never been 2% since the 1960’s.

Krugman’s logic here is straightforward: using “rent” or “imputed rent” is a terribly backward looking statistic, since “rents” only come up every year or longer. As we saw rents jump significantly during the pandemic, it makes little sense to gear inflation fights to that metric, especially since rental increases have toned down dramatically.

It makes even less sense to include office/business rents, which are typically for a 5 or 10 year term, and which are also falling fairly dramatically in the last 12 months (this chart is an average, and includes the period of dramatic escalation as well as a small part of the drop)

He’s arguing for moderation against super-inflation hawks, and I agree given that a soft landing doesn’t come from send the plane toward the ground at 250mph.



The elites are just holding the course right now. Trying to simply placate the public.

The only escape is economies of scale which China can no longer deliver.

If the elites do not buy some time then you get really sick people making decisions that will cost all of us dearly. In fact the sickies will cause more inflation. Plus the sickies wont ever head off inflation.

Cutting the budget does not cut inflation.

In supply side econ there is expediency. Meaning government actions show up right away. Yes there are lies about GDP growth that never pan out. Or about cutting welfare to cut the deficit spending that never pans out.

In demand side econ government actions do not work expediently or immediately. The results are later on as secondary affects. If we listen to little liars we will truly be in trouble here. The debt ceiling was resolved because people actually do know reality in Congress. But those people are not as vocal.

For the lucky country during a period of demand side econ things are so much better and wealthier. Wealth is gathered. Of course you do not see that right now. We just came out of a 40 year failure of supply side econ. No single person offers supply side econ by name as a solution to jack.

They never say “horse and sparrow economics” or “Reaganomics” or “Laffernomics” or whatever the current name is given to the multiply attempted tries at the same failed economic theory. Give it time. It will be introduced as a “NEW AND IMPROVED” economic theory (i.e. the same economic pig with a different lipstick).

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The main reason to look at inflation excluding food and energy is this series is less volatile because food and energy prices fluctuate a lot. But, over time and in the long run, the price index with all components should be used because, as noted, people (and businesses) use food and energy.

It’s easy enough to just look at the CPI data.

CPI actual change over last 12 months, last month: 4.13% (as of May 2023)
CPI actual change over last 6 months: 3.17% (Nov 2022 to May 2023, annualized)
CPI forecast change over last 12 months, next month: 3.22% (as of Jun 2023)

Inflation looks to be approaching 3% annually right now. These numbers point to normalizing inflation, although this normalizing takes some time.

When I see inflation running at 3%, I think the Fed should be careful not to be too restrictive in their policy otherwise they risk a hard landing and causing a deeper economic slowdown than might otherwise be needed.

Cleveland Fed Inflation Forecasting


But we (including @WendyBG) don’t use it! We use the real CPI because that’s all that matters for fixed income investments that are indexed to CPI. There are no investments that I am aware of that are indexed to “core CPI”. Stating that the Fed likes to use core PCE as their primary inflation guide isn’t “using core CPI”.