Consumer Prices: Fed Out Of Its Comfort Zone

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?

Comments

[David Barsan]

It seems to me that political pressures have caused the Fed to cut as much as they already have. The media and the general public seems much more focused on the "credit/housing crisis" than inflation. I assume builders/lenders/banks will continue to pressure the Fed to continue cutting and/or keep rates low for the short-term. My assumption is inflation has higher to run before the Fed decides to do something about it. Only an opinion....what do others say?

[the finalhorseman]

inflation has higher to run before the fed does something? hansnot the fed done enough damage? not only will we end up in 1929 again, but also the 1990 0 interest carry trade fiasco that still haunts japan. at least the fed can keep itself warm by burning the dollars in a wood burning stove.

what about the rest of us poor shnooks?

homeless are living in abandoned dwelling, thieves gut the homes for copper, and the houses are now subject to invasion from drug lords and pimps.

i still havent seen estimates or reports from the sub prime people about the CURRENT CONDITION of said and aforementioned properties.

i have this dread feeling some of these million dollar homes cannot be resold for 10 cents on the dollar because of vandalism.

this country hasnt even SEEN round two...and this might still be a 15-round title fight.

my state has a quadrennial reassessment for RE taxes due this year....in the middle of a non-exsistent housing slump.

try explaining this to the vampire assessor offices.

why cant WE vote for the fed? they lie like politicians...why should they not become politicians?

look who wilson chose to set up the original fed.

[WAKEUP]

In response to the comment by the final horseman, above, I can answer the implied query: the condition of these properties is deteriorating, month-by-month. This is from personal observation, as each month, in traveling around several states this observer counts more smashed windows, more broken deck-railings, and more smoke-scortched siding. Oh, yes, and then there's that one that is now a pile of burned-out rubble, which a few months ago was a decent split-level home.