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CPI up 4.2%, PPI Up 6.2% but Fed Says It’s Transitory
Inflation is running hot but is it transitory and temporary as the Fed’s strategy depend on. In April, the consumer price index was up 4.2% Y/Y, producer prices were up 6.2%. The "core" measures for each of these indexes are running at 3.0% and 4.6%, respectively. The Federal Reserve focuses on the inflation measure for personal consumption expenditures (PCE), which should be up about 3.4% versus a year ago. The Fed thinks the inflation surge, at least when looked at on a year-over-year basis, is overstated because it is built on comparisons to a period when prices were falling during the onset of the COVID-19 crisis. They also think any recent pressures are "transitory," caused by supply-chain issues that should go away as the economy continues to recover.
Central banks around the world have introduced Quantitative Easing in the past decade, with no pick-up in inflation, the Fed thinks any link between money and prices has been broken...Jerome Powell even said we should "unlearn" this idea that money growth causes inflation. The Fed is dismissing the surge in inflation this year. And Fed forecasts show that it expects inflation to fall back down to the 2.0% target in 2022 and beyond.
The question the Fed is dealing with, if PCE inflation for 2021 ends up significantly higher than 2.4%, will it carry any weight?
But this is not the first time in history the Fed has dismissed an increase in inflation as temporary or unworthy of serious policy attention. The Fed sat back and watched as inflation crept upward in the 1960s and 1970s. They blamed OPEC, the value of the dollar, and a stream of one-off events for temporarily lifting prices. The Fed also thought that persistent unemployment needed to be fixed with more money printing. Inflation always starts with a little bit of inflation. And once the Fed gets into the habit of blaming it on "transitory" events, it runs the risk of becoming more of a long-term issue.
Inflation is running hot but is it transitory and temporary as the Fed’s strategy depend on. In April, the consumer price index was up 4.2% Y/Y, producer prices were up 6.2%. The "core" measures for each of these indexes are running at 3.0% and 4.6%, respectively. The Federal Reserve focuses on the inflation measure for personal consumption expenditures (PCE), which should be up about 3.4% versus a year ago. The Fed thinks the inflation surge, at least when looked at on a year-over-year basis, is overstated because it is built on comparisons to a period when prices were falling during the onset of the COVID-19 crisis. They also think any recent pressures are "transitory," caused by supply-chain issues that should go away as the economy continues to recover.
Central banks around the world have introduced Quantitative Easing in the past decade, with no pick-up in inflation, the Fed thinks any link between money and prices has been broken...Jerome Powell even said we should "unlearn" this idea that money growth causes inflation. The Fed is dismissing the surge in inflation this year. And Fed forecasts show that it expects inflation to fall back down to the 2.0% target in 2022 and beyond.
The question the Fed is dealing with, if PCE inflation for 2021 ends up significantly higher than 2.4%, will it carry any weight?
But this is not the first time in history the Fed has dismissed an increase in inflation as temporary or unworthy of serious policy attention. The Fed sat back and watched as inflation crept upward in the 1960s and 1970s. They blamed OPEC, the value of the dollar, and a stream of one-off events for temporarily lifting prices. The Fed also thought that persistent unemployment needed to be fixed with more money printing. Inflation always starts with a little bit of inflation. And once the Fed gets into the habit of blaming it on "transitory" events, it runs the risk of becoming more of a long-term issue.
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