Inflation, the government reported this morning, was running at an annual pace of 2.7% through the end of June. That’s near the fastest rate posted so far this year, falling just short of the 2.8% increase in March.
Granted, 2.7% by itself is nothing to lose sleep over, as headline rates of inflation go. But it’s the upward bias that concerns us. After dropping precipitously in the second half of 2006, inflation has proven itself resilient in bouncing off the low-1% range that briefly triumphed last October, as our chart below shows.
Of course, the Fed looks to core inflation as the superior measure of inflationary trends. The reasoning is that by stripping out the statistically noisy elements of headline inflation (i.e., food and energy), a core reading of pricing trends offers a superior tool for predicting where headline inflation is headed. A number of studies conclude no less. As Alan Blinder, a former Fed vice chairman and currently a Princeton economics professor, told the Wall Street Journal last week: “The Fed is pretty powerless to do something about the price of energy or the price of food. I don’t want to charge the Fed with responsibility for something it can’t do.”