interesting points re ECB / BoE vs Fed policy approach, even if only on surface... http://www.bloomberg.com/apps/news?pid=20601039&sid=abXhN4xd0fSI&refer=home Fed Focuses on Right Target -- Core Inflation: John M. Berry By John Berry Oct. 3 (Bloomberg) -- Federal Reserve officials focus primarily on core inflation in setting monetary policy rather than so-called headline inflation, and despite pointed criticism from some analysts and European central bankers, that's exactly what they should be doing. While core inflation measures in the U.S. exclude food and energy items, most of the difference between the core and headline numbers has been due to whether energy prices are going up or down. Criticism of the Fed has swelled over the past three years as energy prices -- until recent weeks -- mostly went up. In the 12 months ended in August, the consumer price index rose 3.8 percent and the core only 2.8 percent. The difference in the two measures averaged about that same percentage point in 2003, 2004 and 2005. Interestingly, out of the last 15 years, the core CPI has gone up more than the headline number eight times. Over the whole span, the headline CPI has increased more than the core by less than a percentage point. Nevertheless, why shouldn't the Fed focus on the entire CPI? After all, consumers have to pay for the gasoline, heating oil, natural gas and electricity they buy just like clothing, rent, medical care and everything else. The key reason why Fed officials pay greater attention to core inflation is that they generally believe it is a better guide to the underlying level of inflationary pressures in the economy. And monetary policy decisions, such as those to be made at the Sept. 20 meeting of the Federal Open Market Committee, will affect the economy and those inflationary pressures primarily in 2007 and beyond. Other Central Banks Furthermore, the officials know full well that their monetary policy choices will have little if any impact on the price of oil. That reasoning isn't convincing to some other central bankers, such as those at the Bank of England and the European Central Bank, which have official monetary policy targets for their versions of headline inflation. Charles Bean, chief economist of the Bank of England and one of that institution's nine policy makers, disagreed publicly on Aug. 26 with the emphasis on core inflation at the Kansas City Federal Reserve Bank's Jackson Hole conference. The rapid economic development in India and China may have lowered the worldwide cost of many goods while pushing up other prices, Bean said. ``The near-tripling of oil prices over the past couple of years, and the rise in commodity prices more generally, is surely itself in large part a reflection of the rapid industrialization of China and the other emerging economies,'' Bean said. `Blindly Relying' ``The fact that the rise in oil prices is the flip side of the globalization shock to me renders suspect the practice of focusing on measures of core inflation that strip out energy prices, whilst retaining the falling goods prices,'' he said. In a lecture in Dublin, Ireland, on May 11, Axel A. Weber, president of Germany's central bank, the Bundesbank, and a member of the ECB policymaking governing council, expressed similar doubts about ``blindly relying on core inflation as the major benchmark for monetary policy.'' If a major increase in oil prices were ignored, it could allow ``second round effects'' -- such as workers demanding higher wages to offset the loss of real income due to higher costs for energy -- that would cause inflation to rise. Fed officials, from Chairman Ben S. Bernanke on down, have repeatedly said they had to be wary of forestalling such a development in the U.S. So far they have been successful, just as the ECB has been in Europe. More Than Core While Fed officials clearly do focus on core inflation -- particularly the core personal consumption expenditure price index -- they and their staffs also pay a great deal of attention to the overall consumer price index and to some less well known variations of it, such as the ``median CPI'' developed at the Cleveland Federal Reserve Bank. The Dallas Fed has yet another series -- called the trimmed mean personal consumption expenditure price index -- in which the components that have gone up the most and those that have gone down the most are removed. All of these represent attempts to provide information about the most important inflationary forces at work in the U.S. so officials can decide how best to respond to them. Blinder Supports Core In June Princeton University economics professor Alan S. Blinder, a former Fed vice chairman, presented a paper at a Bank of Spain conference in Madrid, in which he said, ``I am firmly in the `core' camp for three related reasons. ``First, monetary policy is unlikely to have much leverage over energy (or food) prices; so it makes sense to focus the central bank's attention on the inflation it can actually do something about. ``Second, even if the bank's true concern is headline inflation -- which is, after all, the inflation that consumers actually experience -- it can probably forecast future headline inflation better by using current and lagged values of core inflation.'' ``Third, I believe that concentrating on core inflation is likely to produce more sensible monetary policy in the face of oil shocks.'' When the ECB's governing council met on Aug. 31, its measure of inflation had gone up 2.3 percent over the previous year, above its target of just under 2 percent. When September figures were added on Sept. 29, a swing in oil prices had lowered the number to 1.8 percent. ECB officials meet again on Oct. 5, and they are widely expected to raise interest rates by a quarter percentage point to 3.25 percent. In a speech Sept. 26, Weber said it's too early to be sure lower oil prices will curb inflationary pressures in the euro zone. Sounds like he has core inflation on his mind. "