Doing the Math on Inflation Figures Inflation fears are stirring the financial markets, for legitimate reasons. David Wessel, deputy Washington bureau chief of The Wall Street Journal, tells Steve Inskeep that the Fed will likely raise interest rates at month's end.

Doing the Math on Inflation Figures

Doing the Math on Inflation Figures

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Inflation fears are stirring the financial markets, for legitimate reasons. David Wessel, deputy Washington bureau chief of The Wall Street Journal, tells Steve Inskeep that the Fed will likely raise interest rates at month's end.


Today's business news cover the price of everything.

Fears of inflation have returned to the financial markets and to the Federal Reserve. Right now we're going to get the big picture on inflation and also the small picture, or a smaller picture anyway, what it means to your wallet.

We've brought in David Wessell, Deputy Washington Bureau Chief for the Wall Street Journal. David, good morning.

Mr. DAVID WESSELL (Deputy Washington Bureau Chief, Wall Street Journal): Good morning.

INSKEEP: And when we see fears of inflation, is inflation really going up?

Mr. WESSELL: Yes, inflation is definitely going up, largely because energy prices are up. Over the last 12 months, energy prices are up 18 percent, so the overall consumer price index is up 3.5 percent for the 12 months ending in April, and that's somewhat higher than it's been.

The question is, is that spilling over into the prices of non-energy goods and services, and that's the big mystery right now.

INSKEEP: Alan Greenspan, the former Fed chairman, made a clearer statement that he used to make, although with lots of qualifiers, saying that he thought it was now beginning to spill over.

Mr. WESSELL: Well, Alan Greenspan is history. What really matters now is what Ben Bernanke, the new Fed Chairman believes. And in a speech recently he made clear that he's worried that inflation is at the upper bound of what he and other Fed officials feel is comfortable.

INSKEEP: Which is significant because he's the guy who might have the power to do something about that, which I guess would be raise interest rates.

Mr. WESSELL: Absolutely. The financial markets interpreted his last statement as a clear signal that he's going to raise interest rates at the end of June, and now there's some speculation that he'll keep raising them after that, which is a change of view. People had been thinking he might take a pause because the economy seems to be slowing down.

INSKEEP: Now, tomorrow we'll find out something more about inflation because the government will release its latest consumer price index. But at the same time there are some people who say that consumer price index does not fairly represent what people have to pay for things.

Mr. WESSELL: That's right. I mean, every time I write a story in the Wall Street Journal about the consumer price index, someone writes me a letter saying, but that's not my experience. And I think that that reflects, sometimes, a misunderstanding of what the consumer price index actually is.

It's an average. It's the price of a basket of goods and services that actually is typical of what no one person actually spends. I mean, for instance, college tuition is 1.1 percent of the consumer price index basket. I have a daughter in college, and I can assure you that college tuition is far more than 1 percent of what I spend. So when they raise prices 6 or 8 percent, as they do, it's a much bigger increase in my personal inflation rate. But that doesn't mean the CPI is inaccurate.

INSKEEP: So what does the Fed use to determine whether inflation is really going up and how much?

Mr. WESSELL: What the Fed likes to do is look at both the consumer price index and another measure called the personal consumption expenditures index. It comes from another part of the government bureaucracy.

And what they do is something that people always find baffling. They tend to strip out the price of food and the price of energy. Consumers find that nutty. After all, in our spending, what happens to food and energy prices is really important. But what the Fed is trying to do is say, what's the core rate of inflation that we can actually control with interest rates? And they have to accept that oil prices are very volatile and they have a lot more to do with what OPEC does than what Ben Bernanke does. And food prices are also volatile. They have a lot to do with the weather and stuff like that.

So they're trying to focus on that piece of inflation that they can control by raising or lowering interest rates.

INSKEEP: What's happening with that piece of inflation?

Mr. WESSELL: Well, that piece of inflation is creeping up, but only a little bit. And so that's the big question for the Fed. Can they let the energy price increase go through and not have it spill over? What they're seeing is just a little bit of that creeping into what's called core inflation, and that's what's got them so itchy.

INSKEEP: So what are they likely to do?

Mr. WESSELL: Well, I think the Fed has made pretty clear that they're likely to raise interest rates at the end of the month, unless there are some new developments that they don't expect. The question is, after that, will they be able to keep the inflation genie in the bottle or will they have to keep raising interest rates to keep the cork in?

INSKEEP: David Wessell, the Wall Street Journal, thanks very much.

Mr. WESSELL: You're welcome.

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