If you’ll permit me to again use a meteorological metaphor: We have some disinflationary tailwinds assisting us. There was a series of monetary policy tightenings by the FOMC that preceded the latest series of pauses that began last August. Also, moderation in energy prices proved beneficial, while continued productivity gains, although less than we had expected, should keep labor costs in check. And spillovers from the unwinding of excessive housing market speculation, including softening in the price of lumber and such commodities as zinc and copper, have all added force to the tailwinds we’ve been seeing. I find it instructive that, other than from corn farmers, I no longer hear business leaders muttering about “pricing power,” which not too long ago was an ever-present part of inflation discussions.
Yet, we do have some inflationary headwinds to overcome. For example, economists use a theoretical metric that attempts to measure the costs of housing—something they refer to as “owner’s equivalent rent,” or OER. OER makes up the largest individual component of the core price index for consumer expenditures, with a 14 percent weight in the index. The way the math works, when the price of the nation’s housing stock declines, this rent equivalent increases. At year end, it was rising at a rate of 4.3 percent, adding to inflationary pressures. Also, the substantial demand for skilled and some semiskilled labor is driving up wages in those important labor pools. And rapid growth in foreign economies—from China and India to our southern neighbors and our friends across the Atlantic—increases global resource utilization, tightening the availability and prices of inputs and labor that American businesses use to control their cost-of-goods-sold and enhance their productivity.
We will monitor the net effect of these headwinds and tailwinds.
I wouldn’t rule out further increases in the federal funds rate if inflationary winds gain the upper hand. Indeed, if increases are needed, I would aggressively advocate for them. But for now, I am as comfortable with the inflationary outlook as a prudent central banker can be. No central banker can ever be smug about containing the risk of inflation, but I am pleased with the current direction of inflationary impulses. To quote from the FOMC statement released after our meeting last week: “Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time.” That said, I will rest a heck of a lot easier when we get the core rate down well below 2 percent and keep it there.
The St. Loius Fed's William Poole:
Regarding the outlook for inflation, I’ve said for quite some time that it might take a while for underlying price pressures to recede. Recent inflation data themselves, and other information relevant to judging the inflation outlook, suggest that the inflation rate is likely to fall into a reasonable range this year. If, however, core inflation seems to be settling at a rate above 2 percent, then such an outcome would be unacceptable to me. I put a very high weight on the Fed’s responsibility to maintain low and stable inflation.
Sandra Pianalto of the Cleveland Fed.
The most recent inflation statistics have improved. The core Consumer Price Index - which excludes food and energy items - rose by about 2-1/2 percent last year. However, during the last three months of the year, this index increased at an annual rate of only about 1-1/2 percent. I regard this movement as an encouraging sign, but I am not yet convinced that the inflation trend is shifting down.
The national inflation picture has been clouded in the past few years by large swings in energy, commodity, and housing prices. As these markets normalize, and as we gain a clearer picture of the underlying inflation trend, we may see that some inflation risks remain. In that case, some additional policy firming may be needed - depending, of course, on the outlook for both inflation and economic growth.
Short version: There is no rate cut in the near future.
