by Nicholas Beaudrot of Electoral Math
As a devoted reader of both Barry Riholtz and Brad DeLong, who have forgotten more about finance and economics than I will probably ever learn, I can only offer an uninformed take on this intellectual steel cage match.
DeLong points out that "when increases in inflation are confined to (i) energy and(ii) food prices, odds are that the increase is transitory and will beself-limiting". Historically, that's been true; in the '90s, if oil prices went up a few dollars a barrel, odds are they would come back down. Food prices follow a similar pattern (largely because energy costs greatly affect food costs). But, that no longer seems to be the case; no one really thinks oil prices will get down to even $50/barrel, and between rising energy costs and increased demand for biofuels, food also seems to have permanently risen in price. As Riholtz argues, Core CPI is low, but other market measures of the dollar's strength—currency exchange rates, gold, the dollar, other commodities—show a weak dollar. It seems that these increases are not transitory, but are really the long overdue correction that George Soros bet on back in 2004 (and Warren Buffet bet on more recently).
Now, maybe this correction is not a bad thing, and maybe the inflation in food and energy costs is self-limited (i.e. it will not have an impact on prices elsewhere in the economy), but it does seem that headline inflation is doing an awful job of reflecting reality for most Americans, for whom the increase in commodity prices definitely affects there discretionary income.
And this doesn't even get into increases in things like individually-born health care costs, college tuition, etc.
Update: See both DeLong and Riholtz in the comments. This chart from the STL fed illustrates what's going on. The orange gray line, representing the difference between headline inflation and core inflation, is the important line:
Historically, overall inflation has stayed within 0.5% of core inflation, and even after the energy crunch in the late 70s, there was a period of correction from 1984 to 1991 where energy prices grew less quickly than other prices. But since 2002, the situation has changed dramatically; food & energy prices continue to rise significantly faster than other prices. If this is part of a permanent trend -- if energy costs will continue to rise 1% or 2% faster than overall prices, should we hit the economy over the head with a brick? I don't know. At the moment, probably not ... it's not clear that slamming on the brakes, which might reduce demand for energy but also hurt employment, will make people better off. After all, the price of energy isn't a large budget item in the cost of college tuition, health insurance, or even medicine...
