Waiting and Hoping: A Dangerous Monetary Strategy

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?

Comments

[Scared Stiff]

Waiting and Hoping-- you've managed to describe the current administration's strategy on everything.

[siresage]

At Shadow Stats, John Williams, has calculated Consumer Inflation using the 1980 methodology, and shows inflation running much higher at about 12%. Since this was the methodology used in the 70's and early 80's why don't you compare apples to apples?

[gordon]

If Bernanke cared about the COUNTRY, and not just is bankers, he could support the dollar by coming out NOW, and saying rates are low enough. And why no media investigation or outcry on the HUNDREDS OF BILLIONS in cash the i-bank's trading desks have exchanged for their toxic debt, and HOW THEY ARE USING THIS MONEY TO PROP THE STOCK MARKET? Are you telling me with the Phili Index falling off a cliff and horrendous earnings, those desks aren't buying the SPY & DIA to bring the market back on any selloff, to try and take the Dow above 12,750 to cause a massive short-squeeze? Why no DISCLOSURE on just where the $350 BILLION these primary dealers are using this money? Paulson's Working Group obviously is propping this market in the greatest socialism of private markets in US history.

[morlock]

Long a grassy knoller but only lately a neophyte trader, nonetheless gotta agree with siresage: $3.81 a gallon at my fav local pump, an energy dependent global economy paying likewise and Fed high volume currency printing of the last couple fiscal quarters feels like a lot more than 4% inflation to me.

I was grown during Carter's double digit inflation and remember housing prices were still nothing even relatively like today's stratospheric, yet to fully burst bubble.
At least banks then wouldn't lend to just any sucker willing to fib on his loan app and have his mortgage secondarily securitized to a CDO.

As to gordon's "socialism of private markets", Fed underwriting of JPMorganChase firesale purchase of Bear Stearns a la LTCM looks to me more like national socialism than anything ever dreamed of by Marx, Engels or Bentham.

I'd be grateful just to pry loose the dead boney hands of Morgan, Prescott Bush and Manfred of Sicily from the levers of power so we can move on to the 21st century.
The current agenda is that of longstanding dynastic wealth, not mere nouveau plutocrats with lobbying clout for legislatively mandated corporate welfare entitlement to pilfer public coffers.

Will thralls still be allowed to place limit orders in their own names ?

[RobertTrudeau]

Screw Ron Paul.

[RobertTrudeau]

SireSage, way to go man! I bet if you let me work the methodology I can get inflation down to 0. The author must be dieting and driving one of those electric cars, because by my old arithmetic today's inflation sure isn't going up gradually. Thank God for all that dirt cheap oversea's labor or we would really be in trouble. Keep the kids working.