The Federal Reserve conducts monetary policy based on how core inflation is behaving. Historically, it has excluded food and energy from its core-inflation calculation because these two consumer staples are affected by short-term events-weather as well as temporary spikes in supply and demand-and the Fed simply doesn't want short-term events affecting monetary policy. But it may be time for the Fed to rethink this policy, says Charles Gradante, managing principal of Hennessee Group LLC, a New York-based adviser that consults investors in hedge funds on asset allocation and manager selection. The firm is also is engaged in the ongoing monitoring of hedge-fund managers. "Is inflation really subsiding?" asks Gradante. "The Federal Reserve maintains that it is, but a visit to the supermarket or the gas station tells another story. Food inflation is rising at the fastest pace in 17 years, oil is more than $75 per barrel and gasoline prices are near all-time highs. Clearly there is a growing disconnect between what the consumer sees and what the Fed sees as inflation." These days, he notes, food and energy costs have been rising because of fundamental changes in those commodities. Corn prices, for instance, are being affected by the demand for ethanol, which in turn affects the price of cereals and other foods. For more on this, see the November issue of Oil and Gas Investor. For a subscription, call 713-260-6441.

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