Fed is finally getting what it wants on the inflation front
THE case for the Federal Reserve having sustainably achieved its 2% inflation target is getting stronger.
On Thursday, the government reported data that showed that the Fed’s preferred way of measuring inflation is continuing forward with its steady trend of moving toward and over the Fed’s inflation target. This performance essentially ensures the central bank will continue with rate rises, but it also indicates there are challenges with that path.
The Commerce Department said in July the overall personal consumption expenditures price index moved to a gain of 2.3% from a year ago, following on from a 2.2% increase the month before. With food and energy costs stripped out, the core July rise from the same month a year ago was 2%, up from June’s 1.9% reading.
As it now stands, inflation pressures are above where central bankers expect them to be longer run. The Fed’s official forecasts have for some time this year predicted that inflation will go slightly over its 2% target. But that overshoot is only seen at 2.1%. Meanwhile, core inflation is now at the 2% reading the Fed has pencilled in for 2018.
The good news for the central bank is that officials have long wanted to see inflation sticking to the target, and despite massive stimulus, it’s taken them years to get to this place. And because they’re at their respec- tive promised land, it helps bolster their case to press forward with a slow and steady pace of rate rises.
Most see the next rise coming in September, when the current funds rate target that stands between 1.75% and 2% will almost certainly be lifted. The debate then moves on to whether the Fed will be able to increase again before the year ends, and there’s less certainty about that.
If inflation continues to stay robust, it could alter the path of monetary policy.
“Fed officials apparently expect core inflation to rise no further from here, but we suspect those projections will prove too sanguine, particularly with wage growth starting to show clearer signs of acceleration,” said a report from Capital Economics.
“In that context, the Fed is likely to continue raising interest rates once a quarter.”
Where the inflation gains grow more complicated is on the spending front. Wage gains have remained relatively modest despite data that shows a super strong job market. The higher inflation goes, the more the realworld value of those wage gains declines. That would mean consumers would face new headwinds in helping keep the economy moving forward, even as companies have been buoyed with record profits in the wake of recent tax cuts.
There’s already evidence consumer attitudes are being weighed down by inflation. If that gets worse, it could create a problem for future growth rates.