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Core CPI may be under control, but the Federal Reserve isn't convinced that the war on inflation is over just yet.

The central bank's "predominant policy concern remains the risk that inflation will fail to moderate as expected," Thursday's FOMC statement advised. That's a verbatim repeat of what the Fed said after the last FOMC meeting in May. But this time, it added a proviso:

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

The warning is all the more striking coming just 13 days after the encouraging report on May's reading of core inflation, the Fed's preferred prism for viewing monetary-policy-relevant pricing trends. More than a few analysts reasoned that after that heartening report on core, the central bank was home free. But now we're told that any cheering was premature.

"The Fed is signaling it wants it proven first that inflation is down and will stay down,'' Gerald Lucas, senior investment strategist in New York at Deutsche Bank, told Bloomberg News after the FOMC release.

According to Reuters, Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York, looked at the news this way, "The take-away point from the Fed statement is that the easing of price pressures thus far has not been sufficient to change the Fed's risk assessment."

From our perspective, we can only wonder why the central bank chose this moment to elevate its rhetorical anxiety over future inflation. Was it the fact that while core inflation looks like a lamb, top-line inflation is still roaring like a lion? If so, then Thursday's rise of oil prices above the $70-a-barrel mark, will only raise anxiety levels. Energy, after all, is the inflation-laced fly in top-CPI's ointment. Ignoring the top-line trend, as we suggested on June 15, won't be easy in a universe populated with politicians and price-sensitive consumers at the start of a presidential election cycle.

Meanwhile, some corners of the Federal Reserve system are warning (pdf) that focusing solely on core for monetary policy is still an experiment. It may prove successful, but the jury's still out.

While the capital markets sort it all out, this much is clear. One, we can rest easy that the odds of a rate cut just went down by more than a little. Two, the economic reports from here on out will receive even closer scrutiny (if such a thing is possible) for clues about inflation's future path.

As Comerica Bank chief economist Dana Johnson told USA Today on Thursday afternoon, "They are going to watch it until the data tells them something is amiss."

Source: Is the War on Inflation Over?