Today’s data release shows core CPI moving up, annualised at 2.3%. It would be unfortunate were it to continue that way; but for the man who put ‘deflation’ on the Fed agenda when still serving with Mr Greenspan, this is conceivably, for now, a Not Altogether Bad Thing as far as Mr Bernanke is concerned.

Historically speaking, the Fed (probably) need not have the violent inflation shakes yet (Exhibit A). Even assuming the official data have issues of understatement, in the absence of a shock, inflation does not spike. It creeps.

Exhibit A: Cap Utilisation & Core CPI since 1970

Thus various Taylor Rule graphs floating around cyberspace show the next US rate move will still be down. These pictures look somewhat like Exhibit B. Yet the devil etc. Are the sensitivity factors for output and inflation gaps appropriate in light of a newish Chair (Exhibit B assumes Greenspan’s)? Are GDP forecasts understating the effect of the persistently cheap dollar? Do inflation forecasts underestimate the pressure from input prices?

Exhibit B: Simple Taylor Rule model
Near imponderables, really; and through it all it is hard to know - despite all the moves to greater Fed transparency and so forth - what Mr Bernanke is truly the most concerned with. The prime suspect would appear to be seized up credit markets. A scholar, as the media frequently reminds, of the Great Depression it is plausible that he considers Job 1 avoiding an inefficient allocation of capital paralleling that which helped choke economic growth in the 1930s. This is certainly the view underlying Fed futures which, as with the Taylor Rule, imply another lop come January.

That outcome looks likely to cloud the outlook for core inflation significantly; and even in the presence of an unofficial, fuzzy and asymmetric Fed PCE/CPI target, risks ordaining inflation a persistently complicating factor.

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  1. The Olive Oil Gazette // 12/15/2007 12:47:00 PM

    Exactly how 'creeping' is inflation, R? Sara Lee announces another, as yet unspecified, across the line increase in the face of flagging profitability. Knowing that last September's (that's three months ago) was 5%, it probably won't be less. A forced reallocation of household resources bodes badly for a number of current world economy givens, not to speak of folks already perched out on the margin.

  2. RJH Adams // 12/15/2007 01:04:00 PM

    I don't disagree on an item by item basis; merely looking at it in the aggregate and how the Fed might be thinking. I stand by 'creep' - but draw no comfort from it.

    What I question is whether the credit crisis merits the scale of intervention the Fed feels obliged to undertake; and the implcations that this has for inflation worry.

    Besides, there are some signs that the market mechanism is dealing with investment bank difficulties (c/f SIV deals & funding). But the Fed presence is definitely interfering with the motivation to bite bullets.

    Course, it's the known unknowns that make one drawback from a having a full-scale arguement about it. But there is a case waiting to be made for a hike (or at least pause) and the benefits of a rebalancing, in spite of the pain involved.



  3. The Olive Oil Gazette // 12/15/2007 03:37:00 PM

    Rudely called away from reading your response - to eat lunch - the first words from Ana's mouth were, '¡Como está subiendo el precio de la comida!' You got it right - 'Is food ever going up alot!'. The point is, without necessarily drawing any conclusions, that we all know well that often price changes (or the recognition of them, at the very least) take on the aspect of state changes. Minimally, Bernanke is viewing the challenge in a very highly focussed fashion.

    While on the subject, the chef(s) of the house would probably be interested in the following:


  4. RJH Adams // 12/15/2007 04:36:00 PM

    Don't start in on non-core inflation: just eat less, problem solved.

    Thanks for the link - now must dip into the relevant recipes...


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