PIMCO's Gross: Food, Energy Are Key to Inflation

Measuring inflation without including food and energy costs no longer makes sense, PIMCO Chief Investment Officer Bill Gross told CNBC.

When looking at the Consumer Price Index, the broadest measure of inflation, the Federal Reserve and economists usually focus on the so-called core rate -- which excludes food and energy -- rather than the "headline" number, which looks at everything.

The reason has been that food and energy tend to be volatile from month to month, so many experts felt that the core rate gave a more accurate picture of inflation.

But more economists and analysts, including Gross, think that the core rate is no longer that meaningful. Because food and energy have risen so much and account for a huge chunk of household expenses, discounting them misses the mark about inflation and can threaten monetary policy, said Gross, who heads up the California-based bond investment giant.

Gross spoke after the release of economic data showing CPI rose 0.4% in March, while the core rate grew 0.2%, about in line with estimates. Energy prices surged 1.9%, however.

"The headline is really what rules and prevails in the real world," Gross said.

"The fact is that commodities, whether it's gas or food, on a worldwide basis are becoming structuralized in terms of their increase, and so the old Fed approach in terms of the core is really just an excuse to maintain an easy monetary posture in times when we need an easy monetary posture."

But aggressive Fed rate-cutting now threatens to drive inflation up even more in the US by weakening the dollar, which Gross said reverberates around the globe.

"Our inflation is basically feeding out into global inflation and the bond markets are beginning to reflect that," he said. "The bond markets on a global basis are afraid of inflation, and I think justifiably so."

Gross said the end result of US economic conditions, with weak growth and a listless stock market, is a flooded market for Treasurys.

"We think that Treasurys are perhaps the most overvalued asset in the world," he said.

© 2008 CNBC.com