Alan Reynolds
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The consumer price index (CPI) less energy increased by 2.4 percent over the past 12 months, but at a 2.8 percent rate over the past six. Are those numbers unusually high?

 As it happens, the CPI ex-energy was never as low as 2.4 percent before 1998 -- it averaged 4.7 percent from 1967 to 2005. That measure of inflation dropped to 2.3 percent in 2002 (when the fed funds rate was 1.7 percent) and to 2.2 percent last year (when the fed funds rate was 3.2 percent). Aside from energy, we are still close to record lows in inflation.

 The six-month pace of 2.8 percent could be more troublesome, if sustained. The ex-energy CPI was 2.7 percent or 2.8 percent in 1967, 1994, 1996 and 2001. The fed funds rate was between 3.9 percent and 4.2 percent in three of those years, by the way, but 5.3 percent in 1996.

 Federal Reserve Chairman Ben Bernanke advocates varying interest rates on bank reserves (and, indirectly, their quantity) depending on some inflation target. What was not known until his speech on June 5 was precisely which measures of inflation he might focus on. His speech defined "core inflation" in the standard manner to exclude both food and energy. Surprisingly, he also highlighted capricious three-month movements multiplied by four (an annual rate).

 Specifically, Bernanke noted that "at annual rates, core inflation as measured by the consumer price index excluding food and energy prices was 3.2 percent over the past three months and 2.8 percent over the past six months. For core inflation based on the price index for personal consumption expenditures, the corresponding three-month and six-month figures are 3 percent and 2.3 percent. These are unwelcome developments."

 Bernanke's speech also described the U.S. economy as in transition to slower growth, suggesting rather ominously that "moderation of economic growth seems now to be underway." That news of slower growth and hint of higher interest rates was understandably unsettling to stock markets.

 Prices of precious metals have also fallen 24 percent to 37 percent since March, which does not demonstrate any widespread impulse to hedge against inflation. It wasn't "fear of inflation" that spooked the markets on June 5, but fear of the Fed. The Fed's fine tuning sometimes goes awry.

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Alan Reynolds

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