The always cogent James Glassman of JPMorgan opines on inflation and why we—and the Fed—should not worry:
November CPI gains were slightly higher than analysts predicted, one of the rare upside surprises in a long time, and it was rightly dismissed as noise by most. For a moment, the upside surprise took many aback, because the core CPI rose 0.3% compared with forecasts of 0.2%. But in retrospect, the report was an issue only for those for whom life is always and everywhere an inflation phenomenon. The actual gain in the November core CPI was 0.27% compared with predictions of around 0.22%. Some indirect spillover from the fall's 50% spike in oil had to be expected. Virtually everyone around the world has been reporting slightly higher inflation readings. Oil's the common thread. The upside surprise in the November CPI came in women's apparel—not men's—implying that seasonal issues, not a weaker dollar was the issue. For those inclined to make a story out of one month's spike, risk takers will be thinking, "fool me once, shame on you ... fool me twice, shame on me" ... The popular quip that it's not fair to exclude food and energy from inflation measures misses the point. No one is pretending that food and oil don't matter. ... The economy is complex and relative prices change constantly in response to myriad factors. Economists devote so much attention to the trend component of inflation, because this has proven to be the most reliable way to determine the economy's underlying inflation tendencies. ... 2008 has the potential to underscore this point in dramatic fashion, if oil prices retreat, as expected. The Fed is being cautious when it forecasts that headline inflation will drop back to core inflation. All that is needed for that to happen is for oil prices to remain at the current $90 level. If they fall back toward $60, where they were in August, it will be much clearer why the Fed tends to focus on core inflation.