Wednesday, December 16, 2009
These two charts show year over year changes in the consumer and producer price indices, the top chart showing total, or "headline" inflation, while the bottom chart shows just "core" inflation (excluding food and energy). Energy prices are a big part of the current headline numbers, as the difference between these two charts illustrates.
Looking at all prices, inflation has jumped rapidly from negative to back to where it was on average over the past decade or so (about 2%). But on the margin, the jump is even more impressive: in the past six months, consumer prices are up at a 4.2% annualized rate, and producer prices are up at a 8.3% annualized rate.
Looking at core prices, inflation is subdued, with the Core CPI rising at a 1.5% annualized rate in the past six months, and the Core PPI rising at a 0.7% rate.
If you're willing to ignore energy prices, then you could agree with the Fed that inflation is far from being a concern these days. If not, though, then you would be pounding the FOMC table today to reverse the quantitative easing ASAP.
I'm willing to concede that energy is indeed volatile, and since energy prices are down this month relative to last month, that their impact in future inflation statistics is going to be minimal. But I continue to believe that the level of core inflation is "the dog that didn't bark," in the sense that it should be far lower than it is, if the Fed's theory of inflation is correct. The economy is still very weak, and there is an awful lot of "resource slack" out there. If resource slack is the thing the Fed is betting on to keep inflation subdued for the foreseeable future, then the Fed governors ought to be pretty nervous right now, because the Core CPI is only half a percent below the Fed's upper target of 2%. The bond market ought to be more nervous too, since breakeven inflation rates on TIPS maturing in 5 years or less is 1.5-2%.
I doubt the FOMC will acknowledge this reality in its statement today, but if they did I would feel a lot better about things.
Posted by Scott Grannis at 8:40 AM