Back in the 1980’s, when I was in graduate school, I remember my [tag]economics[/tag] professor comparing the handling of the American economy with navigating a ship through a narrow channel with dangerous rocks on either side. On the starboard side, the rocks represented inflation — runaway prices that can ultimately destroy an economy. On the port side, the rocks represented anemic [tag]economic growth[/tag] — slow consumer spending, high unemployment, and low corporate earnings.

Over the last couple of years the “core” consumer price index (CPI), which excludes volatile food and energy prices, has been hovering around 2.50 percent. But the overall CPI during the same period, has been closer to four percent — a much more uncomfortable number. Although economists like to look at the core rate as the “real” gauge, inflation is inflation to the American consumer. Just because the inflation is coming from “non-core” places (oil prices, the Katrina aftermath, housing prices, Mid-East conflicts, etc.), prices are higher regardless. Can the Fed control these kinds of things by adjusting short term rates? I doubt it.

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