Bad Headline

Here's the headline: "Inflation jumps in 2007".

Here's the beginning of the article: "Higher costs for energy and food last year pushed inflation up by the largest amount in 17 years, even though prices generally remained tame outside of those two areas."

Yes, that's right. The first sentence contradicts the headline. You have to make it to the end of the article to get the appropriate context:

Outside of food and energy, inflation rose a more moderate 0.2 percent in December. This measure of core inflation rose by 2.4 percent for all of 2007, down slightly from a 2.6 percent increase in 2006.

The Federal Reserve is closely watching to see whether the jump in food and energy becomes more widespread and starts pushing core inflation higher.

Analysts said that with core prices generally remaining well-behaved, it will give the central bank the leeway to cut interest rates further to battle a serious economic slowdown triggered by a steep slump in housing and a spreading credit crisis. ...

Energy costs rose by 17.4 percent this past year while food costs rose by 4.9 percent. Both were the biggest increases since 1990. Gasoline prices were up 29.6 percent, the biggest increase since they soared by 30.1 percent in 1999.

The 2.4 percent rise in prices outside of food and energy was the smallest since a 2.2 percent rise in 2005.

The Fed looks at core inflation independent of food and energy costs because food and energy costs are much more volatile than the rest of the economy for reasons which have nothing to do with economic stability. A hurricane in the Gulf of Mexico, for example, might cause oil and food prices to rise but everything else in the economy to stay relatively the same. The Fed shouldn't be looking at weather forecasts when setting monetary policy.

Additionally, energy prices are highly sensitive to oil prices which are set globally, not nationally. Also, some rise in energy and food prices will affect core inflation, since energy and food are inputs to other goods, and can replace other types of consumption and investment spending.

All in all, I look at this and see good news: core inflation was lower in 2007 than it was in 2006. This should give the Fed some flexibility in combating the financial meltdown which is still deepening.