Wednesday, March 30, 2011

History Backs Bernanke Betting Volatility Variable Won’t Hurt

Federal Reserve Chairman Ben S. Bernanke is betting that surging prices for food and fuel won't wind up breaking the cost of living for Americans. The historical record shows the odds are in his favor.

The Fed watches two key measures of inflation, known to economists as headline and core. The first is based on a basket of goods and services bought by the average American consumer. The second strips out volatile food and energy prices, providing a better picture of long-term trends.

While both have averaged about 2 percent a year since 1996, based on the personal-consumption expenditures index, headline inflation has jumped as high as 4.5 percent and fallen to minus 1 percent. In the same period, changes in core prices ranged from increases of 0.7 percent to 2.6 percent.


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