Policy: Budgets & Deficits

Inflation hits Federal Reserve’s 2 percent target, but still low by other measures

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PennAve,Joseph Lawler,Economy,Federal Reserve,Ben Bernanke,Budgets and Deficits

Inflation is running at 2 percent year-over-year, right at the target set by the Federal Reserve, according to Thursday’s Bureau of Labor Statistics report.

The Consumer Price Index increased by 0.2 percent on a monthly basis in July, lower than June’s 0.5 percent rate and right at analysts’ expectations. The year-over-year change inched up from 1.8 percent in June.

Taken with Wednesday’s reading of Producer Price Index inflation — a measure of inflation from the perspective of sellers that showed a 2.1 percent annual increase in the price level, Thursday’s inflation number should allay fears that inflation could fall too low.

In recent months the Federal Reserve, which is responsible for maintaining price level stability, has become concerned about inflation falling too far below its 2 percent target. In its July meeting statement, the Fed noted that “inflation persistently below [the] 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward [the] objective over the medium term.”

Chairman Ben Bernanke also has said that the central bank will defend its inflation target “from below,” meaning that too-low inflation could prompt the Fed to increase its stimulus purchases, rather than reduce them as planned.

Annual inflation rising to 2 percent in both the CPI and PPI should reassure the Fed and investors that inflation will indeed bounce back over the medium term.

The recent uptick in headline inflation, however, has been driven in part by large energy price increases. Core inflation, which strips out energy and food prices from the final calculation, is considered less volatile and a better indication of the path of inflation. Core inflation is still well below the target level, clocking in at just 1.7 percent over the last year according to the CPI.

And by the measure the Fed pays the most attention to, core inflation derived from Personal Consumption Expenditures, inflation remains near historic lows, at just 1.2 percent in the most recent reading.

Here are the three measures of inflation. In each chart, the blue line is headline inflation, and red is core:

CPI:

PPI:

PCE:

The Federal Reserve Bank also publishes an index of public inflation expectations based on data from bond markets and from surveys. According to their model, inflation expectations have been falling, and markets only expect 1.63 percent inflation over the next 10 years:

So Thursday’s news means that fears of too-low inflation or even outright deflation can be put aside for now. But inflation remains subdued, and is expected to stay that way for a while.

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