Monday, October 01, 2007

What is the core for?

Suddenly I have so much to say about the core CPI, in response to the latest attacks by Barry Ritholtz and Daniel Gross. I've already said most of it in comments to a post by Brad DeLong (also note kharris' insightful comments) and one to the original Barry Ritholtz post. I may reproduce some of them in future posts here, but my last (thus far) comment (from the DeLong post) is probably what needs to be said first:

There are really 3 separate questions here:

(1) What is the best measure of retrospective changes in purchasing power?

(2) What is the best indicator of the general trend in prices (with respect to what can expected in the immediate future)?

(3) What is the best target for monetary policy?

For the first question, obviously the full index is better than the core, and nobody denies that.

For the second question, there is room for debate, but if the only choices are the core and the full index (to measure inflation for a specific period of a year or less), I would still choose the core. (If you let me smooth the inflation rate with, say, an exponential smoother, I might prefer the full index.)

For the third question, I think there is little room for reasonable debate: the core is better. When food and energy prices go up relative to other prices, the optimal policy rule would accommodate those increases so as to allow other prices to remain stable. The increase in the general inflation rate does little harm; the alternative of deflation in the non-core component would do considerable harm.

Messrs. Ritholtz and Gross, and their supporters in this commentary, are finessing the issue by not distinguishing among these three purposes.

The answer to the third question only works if people know roughly what to expect in advance. If people expect the Fed to control the overall inflation rate but the Fed only attempts to control the core, the outcome will not be good when the two start to diverge. People who attack the core index are contributing to the likelihood of such a bad outcome, as well as to the likelihood of the other bad outcome in which the Fed actually does control the full inflation rate even in situations where it shouldn't.

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24 Comments:

Anonymous Anonymous said...

knzn,
These couple of posts seem to indicate that the practice of using core PCE based on transitory energy prices is flawed. Your comments?
http://macroblog.typepad.com/macroblog/2007/07/better-not-best.html
http://macroblog.typepad.com/macroblog/2007/07/better-not-best.html

RB

Wed Oct 03, 06:15:00 PM EDT  
Anonymous Anonymous said...

Oops, the second one should have been:
http://research.stlouisfed.org/publications/mt/20070901/cover.pdf

RB

Wed Oct 03, 06:16:00 PM EDT  
Anonymous Anonymous said...

Hate to triple-dip, but here are the short links:

http://fon.gs/macrocore
http://fon.gs/fedcore

RB

Wed Oct 03, 06:18:00 PM EDT  
Blogger Barry Ritholtz said...

By framing the issue the way you did, you get one answer.

I prefer a different set of questions. These of course generate a different set of answers.

My questions:

1) What is the actual rate of inflation?

2) Why does the BLS model (the official inflation rate) vary so greatly from the real world experience?

3) What are the Fed policy repercussions of the spread between the two?

4) What does this mean to consumers? Investors? Savers?


I am not surprised that traditional economists have circled the wagons around my attack on the credibility of BLS and the Fed. Thats what all Guilds do when they sense a challenge to their authority . . .

Thu Oct 04, 06:59:00 AM EDT  
Blogger jest said...

(1) What is the best measure of retrospective changes in purchasing power?

the measure should be the supply of the purchasing unit. the greater the supply of that unit, the less it purchases.

MV=PT <- that says it all right there.

(2) What is the best indicator of the general trend in prices (with respect to what can expected in the immediate future)?

i think focusing on prices is wrong. inflation has nothing to do with prices; it's purely monetary.

also, prices CAN fall during inflationary periods. real estate is falling now, but commodities are soaring.



(3) What is the best target for monetary policy?

i think the best thing to do is let the market determine monetary policy & interest rates. it determines everything else, so i don't understand why we need to tinker with it when we let the free market determine everything else.

we should only mess around with this only in times of crisis; a recession isn't a crisis, btw.

Thu Oct 04, 08:31:00 AM EDT  
Blogger knzn said...

RB, I was thinking more in terms of the CPI, but I took a look at the Khettry & Mester paper mentioned in the footnote of your second cite. The research still seems too preliminary to draw definite conclusions. They appear to use a forecasting equation with two fitted coefficients, so if we take their results at face value, they still don't necessarily imply that the raw PCE deflator (without the coefficients) is a better predictor than the raw core PCE deflator. I would also bear the Lucas critique in mind here: the relative efficacy of different predictors depends in part on expectations with respect to the policy regime. For example, if the Fed is seen as targeting the raw index but the numerical target is unknown, then predictability can be partly a self-fulfilling prophecy.

Thu Oct 04, 10:59:00 AM EDT  
Blogger Barry Ritholtz said...

I am beating a dead horse here, but let's see what Jean-Claude Trichet, President of the ECB, had to say on this very subject (of core inflation) today:

Risks to the outlook for price developments remain on the upside. They continue to include the possibility of further increases in the prices of oil and agricultural products as well as additional increases in administered prices and indirect taxes beyond those announced thus far. Taking into account the existence of capacity constraints, the favourable momentum of real GDP growth observed over the past few quarters and the positive signs from labour markets, stronger than currently expected wage developments may occur, and an increase in the pricing power in market segments with low competition could materialise. Such developments would pose upward risks to price stability. It is therefore crucial that all parties concerned meet their responsibilities.

The monetary analysis confirms the prevailing upside risks to price stability at medium to longer-term horizons. A broad assessment of the monetary data supports the view that the underlying rate of money and credit growth remains strong. However, the August annual growth rate of close to 12% in the monetary aggregate M3 as well as the annual growth rate of loans to non-financial corporations, which reached a record level of more than 14% in August, may have been influenced by a number of temporary or special factors, such as the flattening of the yield curve and the recent financial market volatility, and may therefore overstate the underlying rate of money and credit expansion.

http://www.ecb.int/press/pressconf/2007/html/is071004.en.html

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小吃餐車加盟連鎖「一條龍的創業模式」複製成功開店經驗
更新日期:2009/08/25 17:19

(中央社訊息服務20090825 16:19:17)大環境不景氣,工作難找,有不少人就想乾脆自己創業當老闆。為強化國內創業能量,五路財神開店總部於8月20日-9月20日舉辦「2009夢幻小餐車創業成果展」歡迎蒞臨參觀。針對國內一窩蜂創業加盟潮,餐車達人陳滌五總監提醒創業者,加盟不失為一條創業捷徑,但若選擇加盟,品牌知名度、產品獨特性及是否擁有差異化優勢就顯得格外重要。
近年來以成本低的小吃餐車最受創業者青睞。沒經驗的失業族 大部份都選擇餐車擺攤,最多人都想在創業市場闖出一片天。在台中成立的五路財神開店總部,小吃餐車用品牌方式來營運,總經理陳滌五用自己的經驗來現身說法。以國人創業首選的小吃餐車來說,如何在同質性高的市場中殺出重圍?雖然是路邊攤小餐車,營運上的重要撇步是關鍵;在企業經營戰略中,唯有領先核心競爭,保持差異化優勢才是生存之道。
陳總分享成功關鍵,「五路財神餐車與其他路邊攤最大的差異化,在於餐車外觀亮眼與眾不同的加分效果,及秉持結合好的小吃產品用品牌方式來經營的理念」。總部成立初期因觀察到傳統路邊攤想要爭得一席之地,大多考量商品創新的迷思,卻忽略創業者經營能否持久性的問題。所以五路財神餐車將傳統小吃商品,用創新工法為策略,顛覆傳統路邊攤的概念,長期下來在台灣建立起最多元品牌的餐車王國。
很多創業者最憂心沒經驗,業界首創從餐車打造、生財器具、原物料配方、技術教學、促銷廣告、開幕指導,「一條龍的創業輔導」模式,使得五路財神餐車品牌特色更為彰顯。陳總說,不景氣下小吃餐車經營是加倍艱辛,建議創業者不但要瞭解小吃經營的核心價值,凸顯產品獨特性及差異化之外還要定期和你商圈的客人互動,「好餐車、好商品、好客人」,三個好,如此才有可能成為「不敗的小吃攤」。
|加盟創業|滷味加盟|加盟|餐車|安親班|廚具||開店|新民管樂|哈比|Eric|校友隊|高中畢旅|全國音樂比賽|特優|痞子英雄|薩克斯風|東大附中|星條旗|離開地球表面|牛仔很忙|陽光宅男|新民管樂畢業生|墓仔埔也敢去

Fri Aug 28, 01:25:00 AM EDT  

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