Wednesday, March 20, 2013

The Fed & Inflation (Excerpt)

In the US, the underlying trend in the CPI inflation rate tends to be driven by labor costs, which reflect wages (boosting inflation) and productivity (reducing inflation). There is a good correlation between core CPI inflation on a y/y basis and wage inflation. There is also a strong inverse correlation between the unemployment rate and wage inflation. The Fed’s working assumption seems to be that wage inflation won’t heat up as the unemployment rate falls. If that assumption is wrong, inflation may not stay as “well anchored” as the FOMC expects, forcing the committee to raise the federal funds rate well before the jobless rate falls to 6.5%.

Today's Morning Briefing: The Fed's Holy Grail. (1) The Fed’s mantra: 6.5% or bust! (2) From date-based to data-based guidance. (3) Esther George may not be lonely for long. (4) Phasing out QE as the quid pro quo for NZIRP. (5) All will be well as long as financial imbalances can be managed. (6) But what if price inflation makes a comeback? (7) There’s still an inverse relationship between jobless rate and wage inflation. (More for subscribers.)

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