All meeting participants remained concerned about the outlook for inflation. Although readings on core inflation had improved modestly since the spring, nearly all participants viewed core inflation as uncomfortably high and stressed the importance of further moderation. Participants expected core inflation to edge lower over time, in part as the pass-through of higher prices for energy and other commodities ran its course and as the moderate growth in aggregate demand likely led to a modest easing of pressures on resources. Some participants also highlighted the impact that movements in the prices of individual components of the price index, such as owners' equivalent rent and medical costs, could have on near-term readings on core inflation. More generally, participants stressed there was considerable uncertainty as to the probable pace and extent of the moderation in core inflation and that the risks around this desired downward path remained to the upside. Moreover, participants expressed concern that a failure of inflation to moderate as expected could entail significant costs if an upward drift in inflation expectations ensued.
OK -- let's translate this eco-geek talk.
1.) Everybody -- each Fed Governor -- was concerned about the inflation outlook. That means everybody from the most dovish to the most hawkish governor.
2.) Nearly everybody -- which I translate as more than a simple majority and most likely at least a super-majority (2/3) -- don't like the current inflation level.
3.) Individual CPI components -- Owner's equivalent rent and medical costs -- are raising eyebrows.
4.) The Fed has used language to the effect of "inflation will moderate over time" for the last few meetings. The problem is, "when"? We know inflation is on everybody's mind and most governor's don't like the current level. Despite the recent downward movement in CPI, the governors are still concerned.
So -- what are the Fed governors looking for? Looking at the latest CPI report, we see a gradual decline in core CPI. For overall CPI, September and October we see declines of .5% and in November we see a 0% advance. The bottom line is the raw numbers don't look half bad.
However -- let's look at the Cleveland Fed's median CPI:
According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (3.0% annualized rate) in November. The median CPI is a measure of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.
Then there is the Dallas Fed's Trimmed Mean PCE:
The trimmed mean PCE inflation rate for November was an annualized 1.2 percent. According to the BEA, the overall PCE inflation rate for November was 0.1 percent, annualized, while the inflation rate for PCE excluding food and energy was 0.5 percent.
The 12-month rate of change was 2.4%. While the 12-month number has decreased for the last 3 months, it is still at an uncomfortable level for the Fed.
I am beginning to suspect these alternate inflation measures carry a bit more weight with the Fed than they are letting on.