If the Federal Reserve is considering the inflation angle for quantitative easing they can go ahead and begin the taper.
U.S. inflation increased less than forecast in August, adding just 0.1 percent to prices and 1.5 percent over the year. Economists had predicted 0.2 percent and 1.6 percent respectively. Both are lower than their July readings of 0.2 percent and 2.0 percent.
Core inflation registered 0.1 percent and 1.8 percent in August, below the 0.2 percent expectation but at par for the year. Inflation in July was 0.2 percent and 1.7 percnt over the past twelve months. The July increase was the smallest in four months but not unusual. The monthly core measure has been 0.1 or 0.2 percent with two exceptions, each 0.3 percent, every month for almost three years.
The annual core rate has had more variation than the monthly rate, rising from a low of 0.6 percent in October 2010 to 2.3 percent for much of the first and second quarters last year then down to 1.6 percent in June and now back to 1.8 percent.
This recent turn higher will hearten the Fed which is as concerned if not more so, in the conditions of the past five years, about deflation than inflation.
The decline in the yearly rate over the past eighteen months from 2.3 percent last April to 1.6 percent in June had been a source of potential worry for the central bank. Prices do not fall steadily in a healthy economy and deflation can impose curbs on economic growth as consumers wait for prices to drop before purchasing.
Inflation and unemployment are the Fed's twin mandates. The Fed's preferred inflation rate is 2.0 percent.
CPI is just one of the factors that the Fed governors are discussing in their meeting today and tomorrow to decide whether the U.S. economy is healthy enough to begin to pull back on its $85 billion a month in Treasury and Mortgage-backed securities purchases.
But with core inflation running close to the Fed target, and drawing higher from its thirteen month bout of disinflation, the governors can probably put this concern, at least for the time being, to rest.
Chief Market Strategist