- Conrad DeQuadros, senior economist at RDQ Economics
Consumer prices are one their way to breach the 2% inflation, while it seems that Janet Yellen and other Fed members would not care at all. During the last six years the Fed has been warning that inflation ca get out of hand, and for now they are still wrong. Despite record-low interest rates and massive growth in the money supply, the inflation rate was well-behaved. Reports over the last several months showed a pickup in inflation, however, even noted inflation hawks like Charles Plosser, Richard Fisher or Esther George do not believe inflation can surpass the 2% target in 2016.
Here are some reasons why the Fed is not concerned about inflation. The indicator can be noisy from time to time, meaning these fluctuations will not be taken into consideration and recent reports will be simply written off. Another fact, is inflation expectations. Currently, the public bet on an average inflation of 1.83% over the next 10 years, meaning the rate is going nowhere. Furthermore, the Fed is aiming at rising housing prices to help households to repair their balance sheets. Indeed, almost a half of the acceleration in inflation in 2013 was contributed by the costs of housing. Another fact, is very weak wage growth, which is a deflationary force as well, as they restrain consumer spending. Finally, the latest increase in inflation was not led by stronger demand. Yellen is not citing inflation during her speeches, however, it seems the Fed will not be upset if inflation goes to 2.5%.
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