Wednesday, July 16, 2008

The CPI is High (is Stagflation Nigh?)

The latest Consumer Price Index numbers (BLS report; NYT story) are not good: inflation was 1.1% for the month of June.

How alarmed depends you are by this depends, in part, on whether you are a believer in focusing on "core" inflation, which excludes food and energy prices. According to the BLS:
The index for energy rose sharply for the second straight month, increasing 6.6 percent in June following a 4.4 percent increase in May. The increase in the energy index accounted for around two-thirds of the overall increase in the all items index in June.
Core inflation still looks rather more tolerable:
Note: I represented core inflation with the core PCE deflator, since that seems to be the Fed's preferred measure (the core CPI would be a smidge higher).

The Fed is expecting the energy price increases to lead to higher core inflation, but they see this as transitory, according to the minutes of the last (June 24-25) FOMC meeting:
The staff's projection for price inflation in core personal consumption expenditures (PCE) for 2008 as a whole was unchanged; recent readings on core PCE inflation were better than anticipated and led the staff to lower its projection for the first half of the year. But some of the recent improvement was seen as reflecting transitory factors, and the forecast of core inflation for the second half of this year and next year was marked up to incorporate the likely pass-through of the recent jumps in the prices of energy and other commodities, and the reversal of these transitory factors. The further large increase in energy prices also prompted an upward revision of the forecast of headline PCE inflation in the second half of 2008, and headline inflation was expected to exceed core inflation by a considerable margin this year. However, in view of a projected leveling-out of energy prices and the anticipated slack in resource utilization, headline inflation was expected to decline considerably in 2009 from its pace in the second half of 2008, and core inflation was forecasted to edge lower.
The projections of the board members and regional presidents appear to be consistent with this.

Willem Buiter thinks they are too sanguine. He says the Fed, Bank of England and ECB "have looked inflation in the face, blinked and hoped for a better tomorrow." Tightening monetary policy when output is falling and unemployment is rising will not be popular, but Buiter believes they need to bite the bullet:
This is your time, guys & gals. This is why central banks were made operationally independent. If you don’t use the political space created by the laws that granted you operational independence to keep the lid on inflation when this is difficult - as it is today - there is no point in granting central banks operational independence. Only determined action by central banks can put the inflation genie back in the bottle. Praying for a miracle won’t do.

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