The consumer price index (CPI) less energy increased by 2.4 percent over the past 12 months, but at a 2.8 percent rate over the past six. Are those numbers unusually high?

 As it happens, the CPI ex-energy was never as low as 2.4 percent before 1998 -- it averaged 4.7 percent from 1967 to 2005. That measure of inflation dropped to 2.3 percent in 2002 (when the fed funds rate was 1.7 percent) and to 2.2 percent last year (when the fed funds rate was 3.2 percent). Aside from energy, we are still close to record lows in inflation.

 The six-month pace of 2.8 percent could be more troublesome, if sustained. The ex-energy CPI was 2.7 percent or 2.8 percent in 1967, 1994, 1996 and 2001. The fed funds rate was between 3.9 percent and 4.2 percent in three of those years, by the way, but 5.3 percent in 1996.

 Federal Reserve Chairman Ben Bernanke advocates varying interest rates on bank reserves (and, indirectly, their quantity) depending on some inflation target. What was not known until his speech on June 5 was precisely which measures of inflation he might focus on. His speech defined "core inflation" in the standard manner to exclude both food and energy. Surprisingly, he also highlighted capricious three-month movements multiplied by four (an annual rate).

 Specifically, Bernanke noted that "at annual rates, core inflation as measured by the consumer price index excluding food and energy prices was 3.2 percent over the past three months and 2.8 percent over the past six months. For core inflation based on the price index for personal consumption expenditures, the corresponding three-month and six-month figures are 3 percent and 2.3 percent. These are unwelcome developments."

 Bernanke's speech also described the U.S. economy as in transition to slower growth, suggesting rather ominously that "moderation of economic growth seems now to be underway." That news of slower growth and hint of higher interest rates was understandably unsettling to stock markets.

 Prices of precious metals have also fallen 24 percent to 37 percent since March, which does not demonstrate any widespread impulse to hedge against inflation. It wasn't "fear of inflation" that spooked the markets on June 5, but fear of the Fed. The Fed's fine tuning sometimes goes awry.

 The stock market rudely rallied when the May CPI came out -- even though the core CPI rose at a 2.8 percent rate over six months and 3.8 percent over three months. Prices of "nondurable less food, beverages and apparel" rose at an annual rate of 38 percent for the three months ending in May, and energy commodities at a 91 percent rate, which shows why it is foolhardy to convert three months into an annual rate.

 The reason for focusing on a "core" inflation rate over several months is to avoid confusing such transitory gyrations in a few prices with a sustained trend in the overall buying power of a dollar. But there are many ways of estimating "core" inflation, and one is demonstrably more informative than the two the Fed chairman picked.

 Whenever anyone suggests increases in the price of energy can predict higher non-energy prices, they imply that the whole idea of leaving energy prices out of core inflation is wrong. Bernanke worried about "any tendency for increases in energy and commodity prices to become permanently embedded in core inflation."

 In reality, the ex-energy CPI has always slowed significantly during the year following major spikes in energy prices. That is partly because the CPI ex-energy already embeds such major indirect effects as the impact of fuel prices on consumer transportation costs, which rose 9.8 percent over the past year. Yet the CPI ex-energy nonetheless remains quite tepid by historical standards.

 Others have expressed concern about "asset inflation" becoming embedded in core inflation. I cannot imagine how that idea ever gained credibility. The U.S. stock market boom of 1997-2000 was not followed by higher inflation. Neither was Japan's land and stock boom of the late 1980s. Strength in asset prices in 1929 was perhaps the world's worst predictor of inflation. Continued...