Producer Price Inflation Isn’t There – Thus No Change In Federal Reserve Policy

Whether and or when the Federal Reserve is going to change its monetary stance is one of those questions we’d like an answer to. The Fed even tell us what it is they’re looking at which will guide their decision. Therefore we can go look at the same things and make up our own minds about that evidence. And, of course, hope like hell that we’re drawing the same conclusions as the Fed:

Food and energy are always more volatile in price than the rest of the economy. That’s why we strip those two out to get our “core” measure of inflation. This being true of any inflation measure we might use, we can have CPI and core CPI, PPI and core PPI, PCE and the Fed’s known target, core PCE. We’re just not seeing much inflation in those core measures. Thus, we don’t think that the Fed’s likely to change course. Their previous forward guidance, perhaps one more rate rise by year-end, thus stays in place as our best informed guess at what’s going to happen.

The Fed is well aware that a great part of their power stems from what we all think they’re going to do. Thus they do provide that forward guidance on how they reach their decisions – in order that we do go read the same evidence they do. For that way, just the arrival of the evidence starts to change our behaviour in the manner they desire. Only major, major, events will therefore throw us a curveball on this.