If Inflation Falls in the Forest

     Ever since Hurricane Katrina made landfall in late August sending oil prices to $70 per barrel and gasoline above $3 a gallon, the media have been in a panic over a return of 70s-style inflation. Such concerns reached a fevered-pitch in October when a gauge of consumer prices rose by the largest amount in 25 years. Yet, when the Labor Department released numbers last week showing that inflation had declined by the greatest percentage in 56 years, rather than using this data to ease the publics concerns about rising prices, the press either downplayed the report or totally ignored it.

     Back in October, when the September consumer price index (CPI) jumped by 1.2 percent, media reports were full of phrases like Hurricanes Katrina and Rita helped make energy prices soar in September at the fastest rate on record, and Inflation in September was the highest since 1980. Two months later when the November CPI fell by 0.6 percent, the greatest amount since Harry S. Truman was president, one prominent papers headline simply read Price Index Shows Big November Drop. Maybe most important, few media made it clear to the public that core prices have only increased by 2.1 percent since last November, an annual rise quite similar to what has been transpiring for many years.

     The worst offender in disparate coverage of these reports was CNN. Virtually every CNN program on October 14 discussed the September CPI report. From American Morning early on Friday to In the Money on Saturday, the cable news channel was all over this story. On Lou Dobbs Tonight, Dobbs began this segment: Tonight middle class Americans and those who aspire to the middle class face a growing cost of living crisis. Inflation last month up at the fastest pace in 25 years, while wages are falling.

     Correspondent Christine Romans entered the discussion: The ingredients of middle class life are getting more expensive by the day. Gasoline, fuel oil, fruits and vegetables, medical care, education, all slashing American spending power. Romans finished the segment on a cheery note: And when you adjust those earnings for these higher prices, Americans' earnings fell in September.

     Another such pessimistic discussion occurred the following day on CNNs In The Money. Sitting in for Jack Cafferty was Susan Lisovicz, whose conversation with guests Christine Romans, and Fortune magazine editor-at-large Andy Serwer began: Well, gang, if you've put gas in your car over the last 30 days or, so you already knew this, but the government just gave us confirmation on Friday, CPI, consumer price index, highest in 25 years?

     Romans responded by mocking what is referred to as the core rate, a number that analysts focus on because it doesnt include highly volatile energy and food prices: And what I say is, can you strip out food and energy in your budget? I don't think you can strip food and energy from your budget.

     Serwer also discounted the core rate: I love the fact that economists don't eat or drive. That always cracks me up. He concluded: There is inflation and, you know, if the Federal Reserve is concerned about inflation, why shouldn't we be? As an editor for a leading financial periodical (Fortune magazine), Serwer should understand the Federal Reserves concern for the core rate better than this. As demonstrated after Katrina hit, energy prices can be extremely volatile and impacted by exogenous events. So can food prices, which can rise dramatically due to a drought in the Midwest for example.

     As such, the Federal Reserve does not want to base monetary policy on economic events that can be short-lived. This is why the Fed pays much more attention to the core rate of inflation to determine if price increases from food and energy are making their way into the rest of the economy. Given that core prices have only risen 2.1 percent in the past twelve months, with energy prices returning to the same levels they were at before hurricane season began, it appears that the Feds reasoning is quite sound.

     Yet, since last Thursdays announcement that consumer prices in November declined by a greater percentage than since shortly after World War II ended, CNN made only one reference to this report through December 18, according to a LexisNexis search. As amazing as it might seem, thats all the time The Most Trusted Name in News devoted to the largest decline in consumer prices since most of its employees were likely born.      The broadcast networks didnt do much better. When the September numbers were released on October 14, the NBC Nightly News actually led with this inflation report. As Americans turned on their television sets after dinner that Friday evening, Brian Williams greeted them with: