The figures released this morning show that the Consumer Price Index rose by 4.3% in the year ended January 2008. The rate of increase in the core inflation rate, the CPI excluding increases in the cost of food and gasoline, rose at an annual rate of 2.5%.
This latter figure is above "the comfort zone of the Federal Reserve," which has been said to be 2.0%.
Two thoughts - first, the Fed is in the space labeled "Damned if you do...damned if you don't!"; and second, the 2.5% rate of increase is only slightly higher that the longer run expectation of the market on inflation.
The Fed has had to deal with financial market dislocation and the fear of a recession. It also has the falling value of the dollar to deal with. What is the Fed to do? Lower rates to combat the problems in financial markets lessen the impact of a recession or raise rates, hopefully slow down inflation and support the value of the dollar. Oh, and there is an election coming up this year...but there is no incumbent running. Can't win?
As reported yesterday, the market's estimation of inflationary expectation is around 2.3% over the longer run. Thus, the 2.5% posted is not that far out of line with market expectations. The question must be...with this new information will market expectations for inflation be revised. Question is...how weak is the economy and how weak will it become? What are your expectations?