Tags: Kellner | inflation | core | prices

MarketWatch's Kellner: Core Inflation Is 'Rotten'

By    |   Friday, 02 August 2013 08:00 AM

Regardless what the Federal Reserve says, rising prices are all around, telling the real story about inflation, according to MarketWatch Chief Economist Irwin Kellner.

Americans' wallets are getting squeezed by price hikes for goods and services ranging from food and magazines to healthcare and cable television. And as Americans pay more, one may assume the Fed would acknowledge increasing inflation.

On the contrary. The nation's central bank claims inflation is still well below its target of 2 percent.

Editor’s Note:
Forbes Columnist: ‘Who the Hell Cleared This?’ (See Shocking Video)

The seemingly divergent reality between what Americans are experiencing and what the Fed is calculating in the result of a "rotten" measurement known as core inflation, Kellner explains.

Core inflation excludes items with volatile prices, such as food and gas. To do so is misleading, says Kellner, because we all consume food and energy every day and those items impact the costs of other goods.

So why does the Fed ignore primary living costs?

Core inflation was the brainstorm of Arthur Burns, a Fed chairman in the early 1970s, Kellner notes.

Burns convinced Congress that food and energy costs were knocked around by factors such as weather and geopolitical developments and weren't really associated with the U.S. economy. Therefore, those items should not be included in the Fed's inflation measurements. And, the Fed continues to subscribe to that view.

Kellner asserts Burns actually developed the skewed concept of core inflation to divert attention from the real price activity so the Fed could run an ultra-easy monetary policy.

Today, the Fed is still using core inflation to redirect focus — from inflation to unemployment, which appeals to politicians, Kellner states.

Dennis Lockhart, president of the Atlanta Fed, addressed Americans' anxiety about prices and the media's criticism of the Fed's take on inflation in 2011, saying we need to remind ourselves of some basic points about inflation and the Fed's obligation to control prices.

"In casual language, we often interpret a rise in the cost of living as inflation. They are not the same thing," Lockhart insisted. "Cost-of-living increases are a result of increases in individual prices relative to other prices and especially relative to income.

"The Fed, like every other central bank, is powerless to prevent fluctuations in the cost of living and increases of individual prices. We do not produce oil. Nor do we grow food or provide healthcare. We cannot prevent the next oil shock, or drought, or a strike somewhere — events that cause prices of certain goods to rise and change your cost of living," Lockhart said.

In addition, he said monetary policy was never designed to control individual prices but rather to control the direction and pace of all prices.

"The point [of monetary policy] is bringing some certainty to planning and long term decision making of individuals and institutions," Lockhart clarified.

Editor’s Note: Forbes Columnist: ‘Who the Hell Cleared This?’ (See Shocking Video)

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Regardless what the Federal Reserve says, rising prices are all around, telling the real story about inflation, according to MarketWatch Chief Economist Irwin Kellner.
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2013-00-02
Friday, 02 August 2013 08:00 AM
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