This chart shows the core rate of inflation (ex-food & energy) according to the Personal Consumption Deflator, on a year-over-year basis, as well as the annualized rate over rolling two-year periods. Once again, it's a "dog that didn't bark" story, since core inflation has not fallen this year as conventional wisdom would have predicted. In fact, the core deflator is up at a 2.4% annual rate for the first five months of this year, despite a significant slump in demand which has left consumer spending today about 5% below where it would have been if the trend of the past few years had not been interrupted. So much for the theory that economic "slack" should result in falling prices, or at the very least a slower rate of price inflation.
The import of this is that the Fed continues to believe in a theory of inflation that isn't very good at predicting inflation. The Fed's theory is telling them that inflation risk is extremely low because the economy is so weak. Thus, they are likely to remain very easy, or too easy, until it becomes obvious that the economy has picked up. That strategy is likely to result in higher-than-expected inflation over time, especially in the current environment: key inflation indicators such as 1) the value of the dollar (weak), 2) gold prices (nearing $1000/oz.), 3) commodity prices (up strongly across the board), and 4) a very steep yield curve are all signaling that measured inflation is likely to be rising in the coming months and years.