Accentuate The Positive

US Economy and Globalization Part 14 of 17

Central banks have good reasons to subtract volatile swings in prices, but routinely excluding food and energyand only food and energyis not, in my opinion, the best we can do. For one thing, not all food and energy prices are excessively volatile. Menu prices at restaurants, for example, are sticky, making information about their Get Rich Trading E-Currency underlying trends quite valuable. Yet, a Big Mac is excluded from the usual core measurements, even though consumers eat millions of them every day. At the same time, other prices can be extremely volatile. Prices of infants’ clothing, for example, are at least as volatile as most food and energy items, but they are included in standard “ex food and energy” versions of the CPI and PCE.

A more discriminating approach might be to exclude the items with the most extreme price changes in a given period, regardless of whether those items are food, energy or anything else. This is the rationale behind trimmed mean measures of core inflation that guide our thinking. At the Dallas Fed, our measure excludes, or trims out, the extreme highs and lows of price changes each month for the PCE. A Secrets of Successful Traders trimmed mean measure is also used by the Reserve Bank of Australia.

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