Picking an Inflation Measure and Sticking With It

It's the Inflation Wars! Barry Ritholtz and Dan Gross and John Wasik and Johnny Debacle and dozens of others are elbowing each other out of the way to proclaim from the rooftops that we have a Serious Inflation Problem and that the Fed should therefore raise rates – or, at the very least, not cut them. Brad DeLong tries to fight against the tide, but he must be feeling a bit lonely out there.

My feeling about all this is that it all depends on which measure of inflation one chooses to target – and this is crucial – ex ante. At any given point in time, something is inflating at a dangerous pace. It might be tech stocks or houses or food prices or wages or hotel rooms or bicycle tires, but the key to taking any given inflation hawk seriously is to ask whether they were in any way reassured that inflation was not a problem when their chosen indicator was not rising in price.

The Fed has said, quite consistently, that the measure of inflation it cares about most is core inflation, as measured in nominal dollars, ex food and energy. You can argue with that decision, but once they've made that decision, I'm not a fan of suddenly deciding when food and energy prices rise that, oh deary me, they do matter for monetary-policy purposes after all.

Personally, if I were going to ask the Fed to target anything, I'd be tempted to ask them to target the TIPS spread on 10-year bonds. But my point is that if the TIPS spread starts gapping out and the Fed isn't targeting it, then they really shouldn't panic and start raising overnight interest rates as a result. The Fed has enough on its plate trying to target just one measure of inflation. Let's not try and force them to target half a dozen.