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The market has not reacted well to the news that consumer price inflation increased at the fastest pace in decades last month.

This is normally where I drag out the tired notation that core inflation, which excludes food and energy prices, ticked up much more slowly. Then one of my commenters points out that ordinary people don't get to exclude food and energy from their budget. Then I respond that, yes, this is true, but from the Federal Reserve's point of view, the fact that certain staple commodities have become relatively scarce does not tell them much about managing the money supply.

Consider that we've had that debate. What does this news mean?

For individuals, it is bad; it means they are paying more for the same basket of commodities they consumed a month ago.

For money supply managers, it is much less bad, but still bad: the rise in core inflation indicates that monetary policy may be too loose.

That's normally not something you want to hear when you're trying to avert a credit crunch and an increasingly likely-looking recession. This news much reduces the Fed's scope for policy response to the subprime problems.

Still, I wouldn't panic just yet. Inflation has been low enough, for long enough, that the Fed has a couple of months worth of random expansion in it, if it's really needed. And I'm not sure that it's really needed.

The market is upset, because the market likes to borrow cheap money. But you shouldn't pin your assessment of the economy, or the future, on the Dow.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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