Mea Culpa – Inflation Nearing Fed Target But That May Not Be Good News

Every once in a while as a blogger you just have to eat your words – and hopefully it is ONLY every once in a while.  Yesterday I wrote that the Fed still had “this innate faith that inflation will magically return to the 2% level”.  And then the Cleveland Fed released its latest figures on the median and trimmed-mean Consumer Price Index (CPI) showing them rising at a 3.2% and 2.1% annualized rate respectively.  In addition, the Bureau of Labor Statistics show the CPI for all urban consumers rising at 2.6% annualized rate and the CPI less food and energy rising at a 2.5% annualized rate. However, the Fed’s favorite inflation indicator, Core PCE, does still remain below their 2% target. But all the other important inflation indicators are at or above their target. So, mea culpa.

It will be interesting to see whether these number will hold over the next few months.  We have already seen weakness in the labor market and in future inflation expectations. And US industrial production was down again in May, the fourth straight month of decline and capacity utilization is still more than 5 percentage points below its historical average. With many economists worried about secular stagnation, a slowing economy with rising inflation may actually portend something worse, call it secular stagflation, where a low or no-growth economy suffers from high inflation.