Federal reserve official: Food, energy costs should be considered in inflation measures

Changing the way the Federal Reserve measures inflation will help it get back in touch with Main Street America, James Bullard, president of the Federal Reserve Bank of St. Louis, told local Rotary clubs Tuesday.

Too much attention is being paid to core inflation, a measure that excludes food and energy prices, he said, speaking to about 140 Cape and Jackson Rotarians and their guests at the Show Me Center.

"This is a pretty big omission. You're throwing out about 20 percent of the index when you throw out food and energy," Bullard said. "The other problem is these are the prices people are seeing day to day. There are other things you might only buy once in a while, but food and energy you're buying all the time."

Bullard believes U.S. monetary policymakers should shift their focus from core inflation to headline inflation, which includes the more volatile food and energy markets.

"I think it's time to get rid of this," Bullard said. "It's not right, it's never been right, and people know it's not right."

Core inflation became a standard in the 1970s and has been entrenched in the minds of policymakers who don't want to consider volatility, Bullard said.

From 2003 to 2006, core inflation averaged about 2 percent, but headline inflation was consistently higher, averaging about 2.9 percent, he said.

Bullard spoke at length about oil prices, saying that ignoring them underestimates the true rate of inflation.

While oil prices were relatively stable from 1988 to 2003, since then they've been trending up, now at about three times what they were in the early 2000s, he said.

Energy prices cannot continue to go up indefinitely, but may continue to go up for many years to come, according to Bullard.

"It is possible for prices in a particular sector of the economy to go up faster than all the other prices for a very long period of time," he said.

Medical care and college tuition prices have increased at a rate higher than the consumer price index over the past 10 years, he said.

"It's a reasonable hypothesis that global demand for energy will outstrip increased supply over the coming decades," Bullard said.

Much of this demand is coming from India and China as their economies continue to improve there.

"If that scenario unfolds, then ignoring energy prices in a price index may systematically understate inflation for many years," Bullard said.

During a news conference following his Rotary presentation, Bullard said he believes the country is in a sustainable economic recovery.

"We face some risks, but we always face some risks," Bullard said.

"Oil prices are coming off their highs because the uncertainty premium that was built in after the turmoil in the Middle East has come down; that will bring gas prices down with it," he said.

Bullard also urged Congress to address "very high" U.S. debt and deficits.

If international markets lose faith in the U.S.' ability to repay, bond yields will go much higher and make the country's financial situation worse, he said.

mmiller@semissourian.com

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