Inflation Dips, “Considerable” Stays

US Inflation Breakdown

The cost of living in United States unexpectedly fell in August for the first time in 16 months, and the annual inflation rate retreated to the lowest level in five months, the US Labor Department reported Wednesday, Sept. 17, in Washington.

“With overall prices down in August, and core prices flat, there are still no indications of increasing inflationary pressures,” said PNC Financial Services Chief Economist Stuart Hoffman and senior economist Gus Faucher.

Core advancing items included

  • Shelter, up 0.2% compared to 0.3% previously
  • Rent, up 0.2% compared to 0.3% previously
  • Lodging away from home, up 0.8% compared to 2% previously
  • New vehicles, up 0.2% compared to 0.3% previously
  • Dairy and related products, up 0.6% compared to 0.3% previously
  • Meats, poultry, fish, and eggs jumped 1.5% compared to 0.3% previously

Core declining items included

  • Medical care commodities, down 0.1% after gaining 0.3% previously
  • Clothing, down 0.2% after gaining 0.2% previously
  • Used cars and trucks, down 0.3% to match the prior month
  • Airfares, down 4.7% after dropping 5.9% previously. They had surged 10.9% over the previous 5 months ended June.
  • Household furnishing, down 0.3% compared to 0.1% previously

FOMC Statement

The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

My opinion: The annual inflation rate has remained at or below 2% since October 2012 with a low of 1% during this period. This fact signals two things to me. (1) The inflation rate has stabilized. Recall that the inflation rate from 2007 to 2009 had highs of 5.6% and lows of -2.1%. Ugh, don’t remind me. (2) The inflation rate remains below 2%, and below the Fed’s long-run goal.  Reason (2) is why the Fed has kept the term “considerable” in its FOMC statement.

Chair Yellen has said that the term ‘considerable’ relates to 6 months or more. As I said in my previous post, I don’t think the Fed will raise interest rates until the inflation rate is around 3%.  Because the second those rates go up, inflation will begin to curb.  So if you want the long-run rate around 2%, then you need to overshoot a little at first to account for this downward pressure later.

I am going to continue to hold firm on my estimate that interest rates will not rise until late Summer 2015 or Fall 2015.  This means that I expect the term ‘considerable’ to remain in the FOMC ‘s statements until January 2015.

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