Here are some signs US in­fla­tion is drift­ing be­low Fed’s goal

Gulf Times Business - - BUSINESS -

Just when you thought US in­fla­tion was sta­bil­is­ing around the Fed­eral Re­serve’s 2% goal, it’s get­ting pulled back down again.

In con­trast to the re­sound­ing suc­cess on their max­i­mum-em­ploy­ment tar­get, pol­icy mak­ers may have to wait a while be­fore declar­ing vic­tory on in­fla­tion as re­cent re­ports show price pres­sures are cool­ing off in­stead.

The slow­down — cov­er­ing the Fed’s pre­ferred price gauge, sur­veys of con­sumers and a poll of man­u­fac­tur­ers — is hard to ig­nore at a time cen­tral bank of­fi­cials em­pha­sise that their de­ci­sions will be in­creas­ingly data de­pen­dent. The path of 2019 in­ter­est-rate hikes looks less cer­tain beyond a widely-ex­pected move in De­cem­ber, which would be the fourth this year.

Mar­kets an­tic­i­pate a slower tight­en­ing pace than the Fed has flagged. On Mon­day, a sec­tion of the US Trea­sury yield curve in­verted for the first time in more than a decade, while fiveyear in­fla­tion ex­pec­ta­tions were near the low­est in more than a year. The fol­low­ing charts high­light what’s hap­pen­ing with in­fla­tion:

While the La­bor Depart­ment’s re­port on Oc­to­ber con­sumer prices was mixed, the lat­est re­sults for the Fed’s own pre­ferred price mea­sure, which is tied to con­sumer spend­ing, came in weak. Even though the so-called PCE gauge met the cen­tral bank’s 2% goal, it failed to ac­cel­er­ate as econ­o­mists had forecast, and has soft­ened since mid-2018.

Ex­clud­ing volatile food and en­ergy costs, PCE in­fla­tion cooled to the slow­est since Fe­bru­ary, bring­ing the three-month an­nu­alised rate to 1.1%. The Fed mon­i­tors the core mea­sure for a bet­ter read on un­der­ly­ing price trends, but it has topped 2% just once this year on an un­rounded ba­sis.

Watch­ing it is even more im­por­tant at a time oil prices have plunged and show lit­tle sign of re­bound­ing, a fac­tor that weighed on a mea­sure of prices paid for ma­te­ri­als by man­u­fac­tur­ers: that in­dex fell by the most in six years in Novem­ber, In­sti­tute for Sup­ply Man­age­ment data showed on Mon­day.

“As al­ways, our de­ci­sions on mon­e­tary pol­icy will be de­signed to keep the econ­omy on track in light of the chang­ing out­look for

jobs and in­fla­tion,” Fed chair­man Jerome Pow­ell said last week in New York.

Amer­i­cans’ views of in­fla­tion ex­pec­ta­tions for the next 12 months also weak­ened in Novem­ber from the prior month, ac­cord­ing to a Uni­ver­sity of Michi­gan sur­vey. The gauge has been soft­en­ing since match­ing a three-year high in Au­gust, though there’s con­cern the tar­iff war with China may lead to higher costs for every­day items

used by house­holds. The an­tic­i­pated in­fla­tion rate over the next five to 10 years rose.

While house­holds ben­e­fit from con­tained in­fla­tion and will find com­fort in lower fuel costs, the Fed tends to be wary of sub­dued longer-term price ex­pec­ta­tions tak­ing hold. That’s be­cause if con­sumers be­lieve in­fla­tion will stay low, it be­comes hard for busi­nesses to raise prices, and in turn, they shy away from rais­ing wages, which then

makes con­sumers even more re­sis­tant to ac­cept­ing higher prices.

Mean­while, worker pay — which tends to feed into in­fla­tion — has also been mov­ing up only grad­u­ally and is yet to show any ma­jor pickup even though the job mar­ket is tight and the un­em­ploy­ment rate is the low­est since 1969. That level is al­ready well beyond what’s con­sid­ered con­sis­tent with full em­ploy­ment, the Fed’s other goal.

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