Joe Weisenthal says the Federal Reserve should ignore gasoline and focus on core inflation. I think the Fed should actually ignore even more than gasoline.
The key argument to me is this. The tool the Fed has to mitigate price increases is that it can throw a lot of people in credit-sensitive industries out of work. That means (in order) construction, autos, and durable goods manufacturing though obviously with knock-on consequences for other sectors. So when you're thinking to yourself "I wish somebody would do something about these darn rising prices" ask yourself whether throwing a lot of workers in credit-sensitive industries out of work would be a reasonable response. If the issue is really that there's some kind of systematic shortage of labor with wages rising faster than productivity and your exporting and import-competing industries withering on the vine, then the answer may well be yes. But if the issue is that growing Chinese demand and fear of war with Iran is pushing up world oil prices, then the answer is clearly no. It's true that when people lose their jobs they tend to start driving less, so creating hundreds of thousands of new unemployed people would free up more gasoline for the rest of us but that's a pretty insane solution. And much as people like to bitch and moan about gas prices and inflation, I don't think any politician would gaze into a camera and say, "I want to make gas cheaper by creating mass unemployment."
And yet mass unemployment is the key inflation-fighting tool at the Fed's disposal. They used it in a big way in the early '80s and in small ways around 1990 and 2000. But if I were running the Fed right now I'd be ignoring lots of stuff. Not only food and energy but other basic commodities and, crucially, rent. Rent is a very big element of CPI. But right now even though high rents are painful to people, we desperately need to power through them to the point where either we build a bunch of new rental housing (jobs) or else cash-rich investors start snapping up all these foreclosed homes and turning them into rental properties. We should also, of course, be changing regulation to facilitate more construction, more supply, and more housing affordability. But the absolute worst thing that could happen right now would be for people to start deciding that mass unemployment is the preferred cure for shortages of rental housing.