Ed Yardeni discusses “What Inflation is Doing”

by Laura Ehrenberg-Chesler on April 2, 2015

in Fed policy,inflation/deflation,interest rates

This is from Ed Yardeni’s research on Tuesday. It is most relevant in the context of the current discussion about how much, and when, the Fed will raise interest rates. “So what is inflation doing? February’s inflation data released in yesterday’s personal income report show that the core PCED remains stuck about half a point below the Fed’s 2% target for this variable. It was up 1.4% y/y during February, and has been hovering around 1.5% for the past 10

months. However, over the past three months through February, the core PCED increased 0.9% (saar), the third consecutive reading below 1.0%. It may be hard for Fed officials to be reasonably confident that inflation is heading higher given the trend of the recent three-month inflation rates. The persistence of the core inflation rate below 2% despite ultra-easy monetary policy in the US and elsewhere over the past six years is certainly puzzling Fed officials. Nevertheless, rather than reassessing their models of inflation, they continue to expect that a tightening labor market will boost wage inflation soon, which then will boost price inflation. In other words, they continue to bet on the Phillips Curve model. Debbie and I have argued on many occasions over the past couple of years that there may be structural forces at work (such as globalization, competition, and innovation) keeping a lid on inflation. If so, then maintaining ultra-easy monetary policy to boost wage and price inflation may instead boost asset inflation. Indeed, easy money actually may be deflationary by boosting supplies of goods and services more than the demand for them, as I’ve discussed before.”

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