In Wednesday's CPI update, the Bureau of Labor Statistics reported that for five months running, the annual pace of consumer price inflation has been running at 4%-plus. That hasn't happened since 1991. (As of last month, CPI is up 4.0% for the past 12 months.)
Core CPI inflation (which excludes food and energy) has been running at the 2%-plus level on an annual basis consistently since September 2004! (The latest numbers show that core CPI rose by 2.4% for the 12 months through last month.) The Fed is widely said to be concerned whenever core inflation is running above 2% with any consistency.
It would seem that inflation generally has jumped a few notches to a higher plateau. The idea that inflation will soon return to lower levels now looks increasingly unlikely. To be fair, headline inflation at 4%, and core inflation in the mid-2% range is hardly the apocalypse. We're still a long way from the inflationary troubles of the 1970s.
But make no mistake: inflation has moved higher to a level that looks likely to endure short of a more hawkish monetary policy. That's not to say that the Fed's going to start hiking rates anytime soon, although we're inclined to think that the days of cutting are just about over. Even so, leaving Fed funds at 2.25% while headline inflation's at 4%-plus looks like a state of affairs that's asking for trouble.
It's important to recognize that history reminds that higher inflation tends to come gradually, almost imperceptibly over time. No one puts out a press release warning that the new inflationary era began last Tuesday at 3:45 p.m. Rather, the process of transitioning from contained inflation to something less contained unfolds slowly, in fits and starts. Only with hindsight is it obvious that pricing pressures have increased by more than a little.
In 2008, the crowd's hoping that the cooling economy will take the wind out of inflation's sails. That's possible, although so far the idea of waiting for macroeconomic salvation for managing pricing pressures has a discouraging track record. Perhaps that's about to change, or not. But given the data so far, one could argue that waiting and hoping seems like an increasingly dangerous strategy when it comes to monetary policy these days. But for the moment, that's the plan and the Fed is sticking to it. But for how long?