More Problems With “Inflation” – Coping With Volatility

More Problems With “Inflation” – Coping With Volatility

Traders work during the opening bell at the New York Stock Exchange (NYSE) on March 5, 2020 at Wall ... [+] Street in New York City. - Wall Street stocks tumbled again in opening trading Thursday on fears of a global slowdown due to the coronavirus, extending the run of volatility that has dominated markets in recent weeks.About 20 minutes into trading, the benchmark Dow Jones Industrial Average was down 2.8 percent, or more 750 points, at 26,324.68. The index surged nearly 1,200 points on Wednesday. (Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE/AFP via Getty Images)

For traders, volatility is breakfast, lunch and dinner – market turbulence is good for making money.

But for policy-makers — like the leaders of the Federal Reserve, the European Central Bank, and the like – volatility in macro-economic indicators is highly indigestible. This is especially a problem for inflation indices, which track prices of goods and services to provide guidance for monetary policy. Some of the leading metrics suffer from excessive volatility in some of the key components. For example, the extreme volatility of energy prices is well-recognized.