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Inflation in the US, Benign or Threat?

Posted by Joseph Trevisani on Aug 3, 2015 4:09:00 PM

For the Federal Reserve and Chair Janet Yellen inflation is a goal that has eluded fulfillment for more than three years.  The last time annual prices rose at the central bank's target 2.0 percent clip was April 2012.

Last month was no exception. The annual core PCE rate in June was 1.3 percent (1.288780), slightly above the 1.2 percent median forecast from the Bloomberg survey of economists.  It was the 38th straight month below 2.0 percent.

The Fed's chosen inflation measure is the personal consumption expenditure core price index, core PCE for short.  This index samples a wider range of goods than the traditional consumer price index and excludes energy and food items on the logic that their greater short term volatility obscures the more important long term trends. 

Of the world's major central banks only the Federal Reserve pins its inflation analysis on the core rate.

The European Central Bank and the Bank of England both use versions of the consumer price index, the CPI rate, or in the case of the ECB a harmonized edition of this, designed to be uniform across all 19 EMU countries, that includes food and energy prices.  

The logic for including food and energy prices is that this headline or non-core CPI rate, is a better analogy for the price changes that consumers’ pay and a better predictor for their behavior when negotiating the effect on consumer spending of inflation. 

Since the annual U.S. core PCE rate dropped through 2.0 percent in May 2012, not only have prices stayed below the target but the trend has been steadily lower.  

The three month moving average for the core PCE rate crossed 2.0 percent in June 2012. It dropped below 1.8 percent that September, 1.6 percent the following April and 1.5 percent in June.  

In 2014 inflation briefly resurfaced. The three month moving average for core PCE rose from 1.47 percent in March to 1.64 percent that July.  But after that six month surge, inflation has moved steadily down again. By December 2014 it was at 1.44 percent, 1.33 percent the following March and 1.28 percent in June. 

The Federal Reserve has two mandated economic responsibilities, to assist in achieving full employment and to maintain price stability.

When Congress enacted those mandates in 1978, core PCE inflation was 7 percent and rising. It would shortly reach 9.7 percent. Headline PCE was headed to a record of 11.6 percent in March 1980. The overall consumer price index would reach 14.8 percent in March 1980.

It would have seemed a preposterous speculation to suggest to those legislators and Fed officials that in a generation the Fed would be struggling to create inflation instead of doing its best to eliminate it.  

The quandary in which the developed world’s central banks find themselves, trying to induce inflation by massive asset purchase and currency printing, is a measure of their success. It is a success they may have come to rue. 


Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

pce aug 3


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