A Wall Street Journal editorial, “Rumors of Stagflation,” describes accelerating inflation in the first quarter GDP report: “The GDP decline … coincided with an accelerating rise in prices. The GDP price index rose at an 8% annual rate on top of 7.1% in the previous quarter. The Fed’s preferred inflation measure, personal consumption expenditures, rose 7%, when its target is 2%.”

The Fed’s preferred inflation measure is really the “core” personal consumption index which excludes some but not all food and energy prices. The Core PCE was up 5.2% in the first quarter, nearly the same as 5% in the fourth quarter of last year and below 6.1% in the second quarter. There is no “accelerating inflation” in the measure the Fed claims to be watching.

The PCE index measures prices consumers pay, including prices for imports. The GDP index excludes prices of imports because they are not part of our domestic product. Most importantly, the GDP index includes export prices for U.S. goods and services (paid by foreign firms, consumers, and governments, not Americans).

Russia’s war with Ukraine has been an unquestionably massive new shock to the global supply and prices of oil and gas, grains, and oilseeds. Talk of “substantial” increases in the fed funds rate with “much higher rates… coming” has pushed the dollar up 8.3% against the Euro, 8.6% against the pound and 13.7% against the yen. This makes the war spike in commodity prices much tougher on other countries, with The Economist’s April 19 commodity index 22% higher than a year ago in Euro compared with 9.4% in dollars.

It would be reckless for the U.S. or European central bank to base monetary policy on any non-core price index that does not even attempt to exclude energy and food prices, such as the U.S. GDP index. But that is only part of the problem. The GDP index greatly magnifies the price distortion from the Russian war because it includes the soaring volume and prices of U.S. exports of liquified natural gas (LNF), coal, grains, and soybeans. The volume of LNG exports is up 25% this year, for example, and the price has exploded. This further increases the GDP price index, as do exports of U.S. scarce grain, metals and more.

Without the shock of war and sanctions to export prices and the headline PCE, the annualized rise in the GDP deflator would probably have been 5% or less.

Central banks are not going to find the right policies by headlining wrong inflation numbers.