Last week, the Bureau of Labor Statistics (BLS) and the Cleveland Federal Reserve reported that consumer inflation measures continued to move higher in January. As shown on the following graph from Calculated Risk, all of the metrics except the core PCE have moved well above the Federal Reserve target of 2 percent after rebounding sharply off of their long-term lows in late 2010.
It is interesting that the Federal Reserve hascommitted to holding interest rates near 0 percent until 2014 even as consumer inflation measures surge above its long-term target. Obviously, Chairman Bernanke believes that the uptrend in these metrics will not continue. However, if consumer inflation measures do move meaningfully higher, Bernanke would be faced with a challenging dilemma. Would he choose to hold rates at excessively low levels and risk the development of a debilitating surge in inflation, or would he choose to start raising interest rates and risk plunging a fragile economy back into recession? It will be important to monitor these metrics carefully during 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.