Monday, June 28, 2010
This index of inflation, the Personal Consumption Deflator, is arguably the best index of inflation from the individual's point of view. It also happens to be the Fed's preferred measure of inflation. Fed governors must be feeling pretty good that despite all the gyrations of the economy and Fed policy over recent years, both versions of this index (headline and ex-food and energy) are within the Fed's target zone of 1-2%.
I must admit that for about the past year I have been expecting inflation to move higher, and so far I have been dead wrong on this. I keep thinking that the Fed's huge addition of reserves to the banking system, coupled with the general weakness of the dollar, the strength in gold prices, the strength in commodity prices, and the steepness of the yield curve, all point to rising inflation, and it is just a matter of time before this occurs. But so far, those who believe that inflation is impossible when the economy is operating well below its full employment level have been right.
This is the kind of error I don't feel too bad about making, since higher inflation tends to have a very corrosive impact on the economy.
Posted by Scott Grannis at 11:29 AM