Not Yet Out of the Inflation-Infested Woods

by: Eddy Elfenbein

Eddy Elfenbein submits: July core and CPI indexes are both in line with estimates. The chart at the bottom shows how core and headline inflation have performed over the past few years.

Sorry folks, but we're still not out of the inflation-fested woods yet.

The good news is that the year-over-year core rate is still lower than where it was during much of 2001. Over the last 12 months, the core CPI was up 2.69%.

The bond market is happy this morning, and the yield on the 30-year Treasury is now close to 5%. The 30-year briefly dipped below 5% earlier this month, but it didn't hold. This time may be different.

For the record, Bernanke said that the Fed sees core CPI falling to 2.25% to 2.5% this year, and 2% to 2.25% next year. I don't think that's going to happen.

The chain-weighted CPI was flat for July, although that's not a seasonally adjusted number, the data series is too new to see a clear seasonal pattern. For the last 12 months, the chain-weighted CPI was up 2.54%.

The Fed funds rate is now 2.56% above the trailing core CPI rate. That's still pretty low for an expansion. During the 1990s, the economy was growing much faster than it is now, and real interest rates were much higher.

I think Lacker was right, the Fed needs to raise rates again.