A somewhat strange story on inflation in the WSJ: Markets Watch, Warily, for a Small Bump in Inflation
Normally, a move of a couple of tenths of a percentage point in the inflation measures wouldn’t matter much to anyone. But the stakes are high now as Federal Reserve officials justify their plan to keep short-term interest rates near zero in part because inflation is running so far below their 2% objective.
Fed officials expect inflation to move from near 1% to 1.5% by year-end. If it moves up sooner or more than they expect, officials could consider raising rates sooner than planned.
Uh, the Fed expects inflation to move up towards 2%, and if it doesn’t, the Fed might slow or stop the tapering of QE3 asset purchases. In her testimony last week, Fed Chair Yellen said: “Looking ahead, I expect that economic activity will expand at a somewhat faster pace this year than it did last year, that the unemployment rate will continue to decline gradually, and that inflation will begin to move up toward 2 per cent.”
The most recent FOMC projections show PCE inflation moving up to 1.5% to 1.6% by Q4, but the Fed wouldn’t raise rates sooner just because inflation rate moved closer to 2% this year – unless employment indicators improved significantly too.
And another sentence from the WSJ article:
The persistent low inflation has befuddled economists who thought Fed easy-money policies would spark rampant price gains.
Well, yes, some economists had the wrong model, but most economists realised that easy-money policies wouldn’t lead to inflation in a depressed economy (I’ve been making fun of incorrect inflation forecasts for years). Eventually we will see a little more inflation – and an increase in inflation towards 2% would be good news – not something to watch “warily” for.
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