Why Bernanke Should Ignore Surging Gas Prices, And Just Focus On The Part Of The CPI That's Tame

The latest CPI data just came out, and here’s what we got: Headline CPI jumped 0.4% in a month. ‘Core CPI’, which excludes food and energy, only went up 0.1%.

It turns out that 80% of the jump in headline CPI was the result of gasoline prices, which have been on something of a tear.

In a tweet, CNBC’s Becky Quick just asked: “Should Fed look at headline or core CPI? (Do higher costs for food & energy matter?)”

People don’t want to hear the answer, but the fact is, the Fed should be looking at core CPI, excluding gas prices. This means they should keep their policy stance very easy, and perhaps even ease some more.

Here’s why.

Higher gas prices are actually deflationary. Yes, they technically cause the index to rise, but they slow the economy, and suck money away from anything else, which might explain why the jump in Core CPI was only half of what economists expected it to be. When there’s a deflationary trend in the economy, the proper response is loose monetary policy.

What’s more, the Fed should only try to address the type of inflation that’s the result of too-loose money, and right now it’s clear that gas prices aren’t the result of too loose money. Higher gas prices are due to a global oil price spike that’s the result of strong growth, and the collapse of non-OPEC supply. And just general, inventories are tight.

If the surge in gas/ or oil prices were about monetary inflation, we’d expect to see rising prices in food and other commodities, but we’re not. In fact, food inflation this month was 0.0%.

Chweck out this table to see how little inflation there is in most parts of the economy. (See the Feb 2012 column, and note the goose egg in the food category).


So stay strong Bernanke. Don’t let the haters slow down. Close your eyes and have the stones to not tighten even as headline CPI continues to jump.

And people calling on Bernanke to tighten should consider whether a move that could slow the entire economy, when unemployment is at 8.3%, is the proper response to higher gas prices.

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