High Inflation at the Gates?

The Federal Reserve needs to raise interest rates to stave off inflation, says Rep. Paul Ryan, R-Wis. “I’m worried they’re not going to pre-empt inflation,” the House Budget Committee Chairman tells CNBC.

“I’m worried they’re going to see it too late and we’re going to have a problem.”

That’s a quote from February 2011. It’s useful, I think, to consider what has happened since then (or since October 2009). Figure 1 depicts three measures of three month annualized inflation, while Figure 2 depicts three measures of corresponding core inflation.

Figure 1: Three month annualized inflation, measured by CPI (blue), chained CPI (red), and personal consumption expenditure deflator (green). NBER defined recession dates shaded gray. Source: BLS and BEA via FRED, NBER and author’s calculations.

Figure 2: Three month annualized core inflation, measured by CPI less food and energy (blue), chained CPI less food and energy (red), and personal consumption expenditure deflator less food and energy (green). CPI measure is calculated using the nsa measure, logged and seasonally adjusted using additive factors over 1999M12-2012M06 period. NBER defined recession dates shaded gray. Source: BLS and BEA via FRED, NBER and author’s calculations.

Note that three month headline inflation is negative, while m/m is zero. Three month core rates are slightly higher, although there is some dispersion.

While current inflation is moderate, one could argue — as Representative Ryan has — that future inflation is the concern. Survey based measures indicate little movement.

Figure from M. Pasaogullari, “Survey measures of inflation expectations,” Economic Trends, July 2, 2012.The five and ten year expected inflation rates are similarly unbudged. Finally, the Cleveland Fed’s measure of expected ten year inflation is near all-time lows.

All of this is just further confirmation of The Curious Persistence Of Inflationary Obsession.

More at Calculated Risk.

This post originally appeared at Econbrowser and is posted with permission.

3 Responses to "High Inflation at the Gates?"

  1. Debora Fabiana Valentinuzzi Spinelli   July 18, 2012 at 1:09 pm

    It is not obsessionary, but mathematical, when you increase the amount of USD available, the value of each in terms of goods goes down and there is nothing you can do about it. The actual inflation only describes the rate of usage of manufactured goods and services versus their availability. O
    What this means is that when people actually realize that their money is not worth what they thought it was, it'll be too late and prices will spike up and the FOMC won't be able to remove the easing fast enough to control price increases as even B. Bernanke indicated today at the House panel meeting.
    Until next time,

    • Matt Dubuque   July 19, 2012 at 8:22 pm

      Bernanke said no such thing.

      And with the Fed sitting on nearly two trillion in Treasuries they are NOT about to commit economic suicide by permitting inflation to erode the value of their holdings.

      Unfortunately this is rocket science to most Americans. The Fed makes out like a BANDIT when we have steady deflation.

  2. Matt Dubuque   July 18, 2012 at 10:20 pm

    With all due respect, this is not a serious argument.

    The Fed has nearly two TRILLION of T-bonds in its portfolio.

    The way they make BIG money on that portfolio is to deflate us.

    You are simply dead wrong.