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Sizing Up the CPI

Just as misbehaving military-schoolers get drummed out of the cadet corps, misbehaving energy prices were drummed out of the CPI core 30 years ago. These days, with energy prices skyrocketing again, some people are talking about letting them back in. That might be a mistake.

The concept of an inflation "core," blissfully divorced from food and energy, was hatched in the laboratory of former Federal Reserve Chairman Arthur Burns. Since Mr. Burns spent much of his tenure getting his arm twisted by President Nixon, some cynics say it isn't a coincidence that, as food and energy prices began to skyrocket in 1973, Mr. Burns pulled them out of the equation when considering monetary policy, saying they were simply too volatile to be credible.

Certainly, for people who live in the real world, talking about inflation while ignoring food and energy prices, as economists still do, is like asking, "Aside from that, Mrs. Lincoln, how did you like the play?" And even some dismal scientists believe that energy, at least, should get closer scrutiny. "One could argue strongly that a key element driving inflation is indeed energy," says Lakshman Achuthan, managing director of the Economic Cycle Research Institute... "I don't know what you accomplish by removing energy from the discussion -- it's 'core' to the discussion..."