My Weak Defense of the Federal Reserve

I’m not a terribly big fan of the Fed, but here’s a weak defense of monetary policy over the past several years. Core CPI inflation has not only remained low, but it’s also been surprisingly consistent. That’s an important point and we should give credit where it’s due.
This chart shows Core CPI (in blue) along with an exponential trendline (in black). The takeaway is that an analyst could have ignored all the data on M2 or M3 and production and all that jazz. Instead, just assume that prices would rise 0.18% each month and that would be a pretty good way to go.

A reader adds:

Just to let you know, there’s a little flaw in this analysis: the 0.18 would have only been known *with insight*. In a nutshell, things look more predictable with insight.
The correct way to do this is to measure the size of the inflation surprise: i.e. for each month in I.1995:IV.2009 compute a best estimate of next month’s cpi using all information available up to that point.
You’ll find that w/o insight (even) Core CPI is a tough one to get right, but perhaps more worryingly so, has gotten tougher to get since 2001.

(No Seeking Alpha repost)

Posted by Eddy Elfenbein on April 17th, 2009 at 10:39 am

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