St. Louis Federal Reserve President James Bullard said on Monday that stripping energy and food costs from inflation measurements may understate inflation. Fed officials have argued that despite recent jumps in the prices of commodities and food, inflation is in check because underlying measures have climbed only modestly from historic lows.
Commodity prices have logged dramatic increases in recent months, he said.
Ignoring energy prices in a price index may systematically understate inflation for many years, he added.
Many Fed officials believe the best way to measure whether their efforts to keep inflation at bay are working is to look at measures of underlying inflation, because that is a better gauge of where inflation is headed.
Bullard further renewed his call for the Fed to adopt an explicit numerical inflation target.
Fed Chairman Ben Bernanke signaled after the Fed's last meeting at the end of April that the U.S. central bank is in no hurry to reverse its massive support for the modest U.S. economic recovery in which unemployment remains above what Fed officials believe is the norm. That support includes rock-bottom benchmark interest rates and will amount to $2.3 trillion in purchases of longer-term assets when the current program winds up.
Many economists and some Fed officials are concerned that inflation risks are rising. Even though oil prices have moderated recently, there is concern that the Fed is ignoring overall inflation because prices for gas and many food items are noticeably higher to many consumers.
Fed officials such as Bernanke have argued that higher energy prices reflect increased global demand from emerging markets such as China, India, and Brazil, rather than too-easy monetary policy in the United States. The chairman and others also say that there is no indication consumers or businesses expect inflation in the future.
However, Bullard said recent events show so-called core inflation that strips out volatile food and energy prices is no longer an accurate gauge of trends and raises doubts in the public's mind about the Fed's effectiveness.
Still, Bullard told reporters he believes the Fed would still be in no rush to tighten policy if it focused on overall inflation rather than underlying inflation. The main problem with an emphasis on core inflation is it makes the Fed look out of touch with the prices most consumers are encountering, he said.
This is hurting Fed credibility to be talking about core inflation when everyone sees headline inflation, Bullard said.