ECB Official: Core Inflation Should be Scrapped as Indicator

Thursday, 02 Jun 2011 07:22 AM

 

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Core inflation is not a good indicator for monetary policy and should probably be scrapped, European Central Bank board member Lorenzo Bini Smaghi said on Thursday.

Bini Smaghi said food and energy prices may increase at a greater rate than that of manufactured goods, pushing headline inflation higher than core inflation — a measure that strips out volatile prices of energy and food commodities — in advanced and emerging countries.

"For central banks around the world, this means that core inflation is no longer a very useful indicator for monetary policy, and should probably be abandoned," he wrote in a guest column in the Financial Times.

Bini Smaghi said strong growth in emerging countries has increased global demand for raw materials in an unprecedented way.

"In the absence of an equally rapid increase in supply, this has produced a lasting change in the terms of trade," he wrote.

He added: "Core inflation has not been a good indicator for forecasting headline inflation. If anything, the opposite has been true."

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