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Fed Tapering - Still Not A Problem

In my last blog post I gave three reasons why I do not think that the Fed's tapering of their quantitative easing program is a cause for concern at the moment. Today's release of CPI data by the Bureau of Labor Statistics also supports this notion. The August data shows that inflation continues to be low. The headline CPI and the core CPI (less food and energy) increased over July by only 0.1% after seasonal adjustment. The primary sources of this modest increase were medical care and shelter, with index for rental residence rising almost 0.4% over the previous month. Over 12 months headline CPI increased only 1.5% (non-seasonally adjusted) while core CPI rose 1.8%. Both of these readings are still below the Fed's 2% inflation target. Additionally the Fed observes personal consumption expenditures price index, which has been growing even more modestly. On the one hand this data implies that the Fed has been able to successfully provide a stimulus to the economy without inflation going out of control and some of the inflation indexes have started to grow, so it can begin to slowly and carefully taper now. On the other hand, it also shows that inflation is still low despite the cash that has been continually pumped into the economy. So even if an expected $10-15 billion taper is announced current inflation levels indicate that the Fed has room to be fairly liberal with the cash.