US CPI Inflation Is Still Below Federal Reserve Targets


The big economic question is, well, when is the Federal Reserve going to raise interest rates again? Or, if you’re very gloomy about Trump’s tax cut boost and its effects, when is the Fed going to lower them again? That is, monetary policy does actually matter.

At which point everyone is looking to the runes of the various inflation measures. On the sensible grounds that the Fed has an inflation target, we can look at how reality is according with that and thus divine. The thing is though, the usual inflation measures that we do look at aren’t the one the Fed is:

So, the Fed’s target is 2% inflation. Here we’ve got 2% inflation. doesn’t that mean we’re on target? Nope. Because we can have a number of different inflation measures. This is CPI, consumer price index. A couple of days back we had the producer price index. Not correctly but usefully the difference between the two is what we pay and what producers charge. The difference being the costs of the distribution and retail system between us both. There are many more. We can and do measure the CPI for pensioners, for urban and rural consumers. We can have near any number of different indices dependent upon the details of what we think important to measure. The Fed has chosen PCE as their index, the one they’ll manage to. This is still lower than the 2% target.

The reality being that there’s really no such thing as “inflation”, or perhaps more accurately, no such this as “the” inflation rate. It depends upon what you measure and how you measure it.

The Fed’s interested in core PCE – personal consumption expenditure having removed the highly variable fuels and foods from that index. This is below target, so therefore no interest rate rise beyond the one pencilled in for late this year.

Well, maybe. Because monetary policy is said to take 18 months to influence inflation, therefore it’s really whether the Fed thinks that core PCE will be on target in 18 month’s time. Which is a bit more difficult for us to predict, what they think the future might be.