Feb 2, 2015
Inflation Reading Furthest Away From Fed Target Since 2009
By Eric Morath
"A rapid deceleration in consumer inflation could complicate the Federal Reserve’s calculus for when to lift short-term interest rates from near zero.
"The price index for personal consumption expenditures, the Fed’s preferred inflation measure, was up 0.7% in December from a year earlier, the Commerce Department said Monday. That was the smallest 12-month gain for consumer prices since October 2009, just after the economy started emerging from a deep recession.
"Fed officials have signaled their intent to raise benchmark interest rates this year for the first time since 2006. Doing so could be difficult if price increases continue to far undershoot the central bank’s 2% target, suggesting weak demand persists in the economy.
"The inflation gauge has failed to even match the Fed target for 32 straight months.
"A swift fall in oil and related energy products is responsible for the decline in overall inflation from 1.6% in July. Fed officials have largely dismissed the pullback as a “transitory” factor that will ultimately prove short-lived.
"But energy is not the only factor in the economy weighing on price gains. “Stagnant household incomes have resulted in a lack of demand for retailers and manufacturers,” said Navy Federal Credit Union economist Alan MacEachin. “They don’t have any pricing flexibility.”
"Steady job creation has helped to push the unemployment rate down to 5.6%, the lowest level since 2008. That rate would likely need to drop further, into the 4% range, to force employers to lift wages in order to attract workers, Mr. MacEachin said.
"Inflation has been steadier outside of volatile food and energy prices. But that measure of “core” inflation also slipped slightly in recent months, from a 1.5% annual advance in October to 1.3% in December.
"The easing could reflect a pass-through from lower transportation costs to other products. It also could show that the relative strength of the U.S. economy has boosted the value of the dollar, allowing consumers to pay less for foreign-made goods beyond petroleum.
"The latest readings could reinforce the lack of urgency for the Fed to raise short-term interest rates despite steady job creation. Officials last week said they “can be patient in beginning to normalize the stance of monetary policy.”
"Some economists are questioning whether the slower price gains represent a temporary blip or deeper causes, such as a weakening global economy.
“I’m not sure you can call it transitory” when consumer inflation has been below 2% for nearly three years, said Wells Fargo chief economist John Silvia. “When you look at Europe and you look at China, you have a global economy that’s growing much less you would have expected two or three years ago.”
"Weak global growth slackens demand for oil and other commodities and has a downward effect on prices for U.S. consumers.
"Typically, as the economy heats up the Fed raises rates. The central bank’s rate target today remains at the ultra-low levels established during the depths of the recession, despite economic growth showing signs of accelerating over the last three quarters of 2014."
http://blogs.wsj.com/economics/2015...-away-from-fed-target-since-2009/?mod=WSJBlog
Inflation Reading Furthest Away From Fed Target Since 2009
By Eric Morath
"A rapid deceleration in consumer inflation could complicate the Federal Reserve’s calculus for when to lift short-term interest rates from near zero.
"The price index for personal consumption expenditures, the Fed’s preferred inflation measure, was up 0.7% in December from a year earlier, the Commerce Department said Monday. That was the smallest 12-month gain for consumer prices since October 2009, just after the economy started emerging from a deep recession.
"Fed officials have signaled their intent to raise benchmark interest rates this year for the first time since 2006. Doing so could be difficult if price increases continue to far undershoot the central bank’s 2% target, suggesting weak demand persists in the economy.
"The inflation gauge has failed to even match the Fed target for 32 straight months.
"A swift fall in oil and related energy products is responsible for the decline in overall inflation from 1.6% in July. Fed officials have largely dismissed the pullback as a “transitory” factor that will ultimately prove short-lived.
"But energy is not the only factor in the economy weighing on price gains. “Stagnant household incomes have resulted in a lack of demand for retailers and manufacturers,” said Navy Federal Credit Union economist Alan MacEachin. “They don’t have any pricing flexibility.”
"Steady job creation has helped to push the unemployment rate down to 5.6%, the lowest level since 2008. That rate would likely need to drop further, into the 4% range, to force employers to lift wages in order to attract workers, Mr. MacEachin said.
"Inflation has been steadier outside of volatile food and energy prices. But that measure of “core” inflation also slipped slightly in recent months, from a 1.5% annual advance in October to 1.3% in December.
"The easing could reflect a pass-through from lower transportation costs to other products. It also could show that the relative strength of the U.S. economy has boosted the value of the dollar, allowing consumers to pay less for foreign-made goods beyond petroleum.
"The latest readings could reinforce the lack of urgency for the Fed to raise short-term interest rates despite steady job creation. Officials last week said they “can be patient in beginning to normalize the stance of monetary policy.”
"Some economists are questioning whether the slower price gains represent a temporary blip or deeper causes, such as a weakening global economy.
“I’m not sure you can call it transitory” when consumer inflation has been below 2% for nearly three years, said Wells Fargo chief economist John Silvia. “When you look at Europe and you look at China, you have a global economy that’s growing much less you would have expected two or three years ago.”
"Weak global growth slackens demand for oil and other commodities and has a downward effect on prices for U.S. consumers.
"Typically, as the economy heats up the Fed raises rates. The central bank’s rate target today remains at the ultra-low levels established during the depths of the recession, despite economic growth showing signs of accelerating over the last three quarters of 2014."
http://blogs.wsj.com/economics/2015...-away-from-fed-target-since-2009/?mod=WSJBlog
