Supercore! (Wonkish)

Two questions about inflation:

1. What would the ECB be doing if it were the Fed?
2. Why have some measures of US core inflation ticked up slightly recently?

On the first question, Eurostat offers us a consumer price index sans energy, food, and tobacco, which is more or less US-style core. Here’s what the 12-month change looks like:


The eurozone looks like the United States — there is no good reason to raise rates. To be fair, on the labor side things look a bit different: there are actual labor shortages in some parts of Europe, reflecting both low labor mobility and the extreme asymmetry of the European shock. But raising rates for all of Europe because parts of Germany are doing well is, as I’ve written before, worse than the one-size-fits-all policy euroskeptics warned about; it’s one size fits one. And the case for a somewhat higher inflation target is even stronger for the euro zone than it is for the US.

Meanwhile, back in the new country: US core inflation has ticked up slightly recently. What’s that about?

I’ve suspected that what we’re really seeing is the inadequacy of even core inflation as a way to purge transitory effects of volatile prices: the measure takes out purchases of food and energy, but it doesn’t take out indirect effects of raw material prices on costs. New research from Goldman Sachs (no link) seems to support that view: it finds that core inflation is getting a temporary bump from the prices of imported raw materials, and will probably subside if the commodity surge is in fact over.

This in turn suggests that policy should really be based on some kind of “supercore” inflation. Should this simply be wage growth? Adam Posen at the Bank of England has certainly gone well down this route, arguing that the relatively high rate of even core inflation in the UK reflects one-off factors and that stagnant wages show that there are few risks. And I totally agree with Posen about the UK policy issues.

Yet there are problems with a wage target — mainly, you don’t want to base policy on the notion that wage gains are always a bad thing. Maybe adding a trend productivity adjustment would do the trick. More systematic thoughts when I have time.

Anyway, the bottom line for now is that neither the Fed nor the ECB should be at all concerned about inflation. Unfortunately, the ECB is not interested in having its orthodoxy challenged.