When the Bureau of Labor Statistics reports the monthly consumer price index (CPI), two numbers are the main focus - the overall CPI and CPI ex Food & Energy. For example, this morning's report showed that, overall, the CPI was up 0.2% (implying roughly a 2.4% annual inflation rate) and ex Food and Energy was up 0.1% (or at roughly a 1.2% annual rate ). The ex Food and Energy annual rate of 1.2% is below the Fed target for inflation of 2% annual rate, whereas the overall number at 2.4% is above the annual target.
Why do they even take out food and energy? After all, we need to eat and we use energy in everything we do. The party line is that food prices are volatile because of the weather and energy prices are heavily influenced by world oil producers as well as the weather. Thus, monetary policy actions by the Federal Reserve won't necessarily counteract those price pressures. Thus, to assess whether inflation is on the right track or not, according to the Bureau of Labor Statistics, it makes sense to pull out food and energy. One thing for sure - if you take out a number of things, you'll eventually arrive at a number you like.
This takes on even more importance today because the Fed's stated goal is to increase inflation. They believe that inflating the economy will lead to job creation.
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