Barry Ritzholtz in TheStreet.com and Daniel Gross in the New York Times note the debate arising over inflation and how it should be measured. Both note the important role that energy has played in driving up headline measures of inflation. However policy makers and many analysts focus on ‘core’ measures of inflation that ex- out volatilite items like energy and food.

While it may make sense to use different measures of inflation to answer different questions about the economy, Gross notes that for real people core inflation is an artificial construct:

Aside from the stuff that’s becoming more expensive, like food and energy, there is no problem with inflation in the economy. That’s the message economists want us to take from recent inflation reports.

Ritholtz takes the issue one step further and puts it in an investment context. Ignoring inflation could indeed have a negative impact on your portfolio:

It is crucial for investors to have a realistic understanding of how robust inflation is. Doing so early reveals investment opportunities that those who focus on the core CPI have missed. In particular, oil, commodities and gold have been attractive investments overlooked by the “no inflation” crowd.

Now, as the Fed rate tightening cycle goes from being accommodative to neutral and beyond, the risk to domestic equity holders increases. I have been advising clients that as we come to the end of 2005, they should be getting increasingly defensive. In addition to owning gold, they should be looking to increase their exposure overseas.

Those who live in a synthetic reality — seasonally adjusted, hedonically altered — will confront the unpleasant reality of the real universe. Ignoring inflationary data in the CPI won’t make it go away. All that accomplishes is to shift the focus away from precisely where it should be: on the part of CPI that has been rapidly increasing in price.

Those who fail to grasp this will pay a heavy price for their self-imposed ignorance.