Inflation Statistics: Best Ignored, Unless You're Poor

There's lots of chatter today about the inflation numbers, and whether we should care more about the headline number or the core number – which wags like to call "inflation ex-inflation". Just like any individual statistical datapoint, however, this one means very little. The core rate of 0.1% is indeed low, but in fact it was thisclose to hitting the market expectations of 0.2%. Meanwhile, the headline rate of 0.7% is indeed high, but headline inflation is incredibly volatile. In September 2005, it reached 1.2%, which presaged nothing except a negative reading the following month.

Barry Ritholtz and Kash Mansori both have graphs up today showing core and headline inflation. They're both pretty volatile series, but the latter is clearly so volatile that a single high datapoint must be considered all but meaningless. As ever, unless you are paid to follow the market's intraday gyrations, all such releases are really best ignored.

On the other hand, it does seem clear that there is a significant and positive gap emerging between headline inflation (which includes food and energy prices) and core inflation (which strips them out). The gap is essentially a tax on poverty.

The poor spend a much larger percentage of their income on food and energy than the rich do, and they don't benefit much from large drops in microprocessor prices. If this gap is sustained going forwards, then the real income of the poor is going to be eroded by inflation much more quickly than the real income of the rich. Not that there's much the poor can do about it. The rich, on the other hand, have the Federal Reserve on their side, since the Fed targets the core inflation rate.