Tuesday, November 12, 2013

The Fed & Inflation (excerpt)

Fed officials have said that their ultra-easy monetary policy is justified not only by weakness in the labor markets but also by declining consumer price inflation, especially if it gets too close to deflation. They’ve indicated that even if the unemployment rate falls down to 6.5%, they might be in no rush to tighten policy if inflation remains too low.

While Friday’s employment report received lots of attention, the inflation data in the personal income report were mostly overlooked. The personal consumption expenditures deflator excluding food and energy (a.k.a. the “core” PCED) was up only 1.2% y/y during September, which was also well below the core CPI inflation rate of 1.7%. The core PCED inflation rate has been below the Fed’s 2% target since October 2008 for all but four months in early 2012 (when it was around 2%).

While rent inflation has been trending higher since 2010, the inflation rates for hospital fees and physician services have declined significantly. The former is down to 1.5%, the lowest since December 1998, while the latter is down to zero, the lowest since February 2003. Why would the Fed possibly want to see these inflation rates move higher?

Today's Morning Briefing: Inflating Inflation. (1) Taper chatter is back. (2) There are two goals in the dual mandate. (3) Inflation remains below target. (4) Consumer durable goods prices on long decline. (5) Drug prices weighing on nondurable goods inflation rate. (6) Rent inflation is boosting services, while hospitals and doctors are not. (7) Why do central bankers want higher inflation? (8) Friedman’s truism not so true recently. (9) Liquidity is boosting asset inflation, not price inflation. (10) Central banks don’t control real incomes. (11) CPI inflation squeezing wages in Japan. (More for subscribers.)

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