Energy and Inflation

Posted by | June 25, 2007 | Weblogs | No Comments

The Rate of Inflation which has become a cause of concern in the U.S, includes a important and controversial component, the energy cost. Picerno, in his article “What do Higher Energy Cost Mean of Inflation”(Seeking Alpha) talks about the exisence of two measure of inflation and the disparity between them. The difference between the two measure could be a cause of concern for the policymaker and the economy as such.

The two measure that the blog talks is the top line measure and the core measure which again is based on two important indicators, the CPI(Consumer price Index) and PCE (Personal Consumption Expenditure Index). The disparity lies in the fact that Energy cost is included in the top line inflation measure(which is showing an upward trend). Wherase in case of core inflation this cost along with food is excluded!

Therefore monetary policy cannot be implemented on the basis of Core Inflation measure because this excludes energy prices which is an important component.

Talking of energy or oil prices, there is a transistion in this sector itself where people are looking at alternate sources of energy…so the debate remains on the change of scene and for how long oil prices will form the basis of energy cost!

Now as far as the rising oil prices are concerned it depends on the global and the political scenario and hence more stability needs to be bought about in this sphere. I think this change might happen when a cost effecient renewable source of energy is found and forms the basis of the energy cost. But there is a time factor involved in bringing about this change and until which measure of Inflation should we follow?

Since it is absolutely baseless to implement any form of monetary policy excluding the energy sector, I guess Picerno is right when he says that all the price indexs must be considered while structuring the monetary policy. Gues this dual measure his here to stay!

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