BoE hits at US inflation measure

The US Federal Reserve is wrong to focus on core measures of inflation that exclude energy prices, Charles Bean, chief economist at the Bank of England, has suggested.

It should focus instead on headline inflation, which is much higher, he argued. Including energy and food costs, US consumer price inflation is running at an annual rate of 4.1 per cent, against 2.7 per cent for core inflation.

Mr Bean told the Fed’s annual Jackson Hole symposium at the weekend that energy prices were rising for the same reason the price of many manufactured goods were falling: the rise of China and other emerging market economies. Since both price trends had a common cause, he said it makes little sense to focus “on measures of core inflation that strip out energy prices while not stripping out falling goods prices as well.”

Mr Bean did not mention the Fed by name but his implication was clear. Fed officials, including chairman Ben Bernanke, typically talk about measures of core inflation excluding volatile food and energy prices, which they say better predict future headline inflation.

Central bankers in Europe take a sharply different approach. Both the Bank of England and the European Central Bank put greater emphasis on talk of headline inflation, which includes the immediate “first round” effect of rising energy prices.

The Fed has tended to treat the rise in oil prices as a step change to a new equilibrium price level, which in itself does not generate ongoing inflationary pressure. It focuses on trying to prevent the “pass through” of higher energy costs to consumers in the form of higher prices for other goods and services.

But the Bank of England and the ECB increasingly take the view that energy prices may be on a long-term upward trend, driven by industrialisation and urbanisation in China and India.