Core Inflation

Some Kids (somewhat derogatory towards Those whose only crime is being younger than your own advanced years) asked me to explain the difference between the Inflation rate and Core Inflation. I knew immediately that I was in trouble, as Someone was trying to pin me down on a definition. Think of the Inflation rate as a Highway Speed you are traveling at, 0% Inflation increase is the Speed at which you would most enjoy to travel, and Core Inflation is the Speed at which Everyone is traveling after Everyone has applied as much Braking as they could safely apply. Such an idiotic Reply could get me thrown out of the Bloggers union, but there it is!

Core Inflation will tell you little, unless and until One understands how the Brakes are applied in this formula. The rationale for this Braking in the maintenance of Current Sales levels for Business, and avoidance of later Pay Increases to Labor. The methodology of Braking vary into multiple forms limited only by the inventive capacities of Business management. The most desired form is to increase the Productivity of their own Employees, but there are limits to this radical Driving, mostly shown as long-term Employee exhaustion and loss of Incentive. The most common form of eventual Braking is by increase of Operating Capital, and reduction of Profitability per unit of Product; adopted by Management only within the presence of dropping Sales. The thing which must be remembered is the Speed can never reduce to 0% Core Inflation, as long as there is volatile Commodity prices on upward trend.

The Above does not proclaim that there can’t be Deflation, which can occur under the right circumstances. The major characteristic necessary for Deflationary conditions again centers on the prices of Commodities, for which there must be oversupply and falling Prices. Simple declining Prices of Retail Product will not generate Deflation, only declining Production Costs can actually produce the Condition. Everyone argues about the exact conditions necessary for Inflation and Deflation, but I hold that Inflation starts after Core Inflation reaches a -0.2% Core Inflation rate, and Core Inflation must be below -0.7% for two months serially for Deflation to occur. Does all this sound like Bull? I try! lgl