Inflation: Timing is Everything

The Federal Reserve Bank in Cleveland measured the median Consumer Price Index at a 2.1 percent annualized rate in November, above the Federal Reserve’s 2 percent inflation target. Meanwhile, the median CPI has risen 2.5 percent over the last 12 months and the CPI excluding food and energy, volatility components that often receive steep discounts, rose 2 percent.

Since the summer, only September saw a decline in CPI, which fell 0.2 percent. However, the trimmed-mean CPI, median CPI, and CPI less food and energy all posted sharp increases.

The Federal Reserve Bank in Cleveland measured the median Consumer Price Index at a 2.1 percent annualized rate in November, above the Federal Reserve’s 2 percent inflation target. Meanwhile, the median CPI has risen 2.5 percent over the last 12 months and the CPI excluding food and energy, volatility components that often receive steep discounts, rose 2 percent.

Since the summer, only September saw a decline in CPI, which fell 0.2 percent. However, the trimmed-mean CPI, median CPI, and CPI less food and energy all posted sharp increases.

A Certain Rate Hike?

Previously, economists warned that a rate hike would prove premature because inflation rates do not accelerate at a significant rate. University of Oregon economics professor Tim Duy recently wrote that a lack of inflationary pressures means the Federal Reserve has time to wait to raise rates.  However, because it has strongly signaled to the markets that a rate hike will come in December, it is likely to announce a modest increase and a slow path towards normalized interest rates throughout 2016.

“Yellen is wedded to the theory that the sooner the Fed begins normalizing policy, the more likely the Fed can avoid a recession-inducing sharp rise in rates,” Duy wrote in a blog post.  This cites a recent speech Yellen gave in which she said that the Fed could not wait too long, because if it did, it would have too little time to raise rates, forcing “relatively abrupt” increases.

“Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession,” Yellen said.

A Substantial Recovery

Janet Yellen recently emphasized that the U.S. economy has experienced a “substantial recovery” since the Great Recession, adding that unemployment has reached an almost “normal level,” adding that there are indications of a strengthening in the job market for most Americans.

While labor incomes have remained depressed and been down in both real and nominal terms since their peak before 2009, Janet Yellen cited a strong growth in earnings that indicated a stronger job market. “Until recently labor compensation had grown only modestly, at average annual rates of around 2 to 2-1/2 percent. More recently, however, we have seen a welcome pickup in the growth rate of average hourly earnings for all employees and of compensation per hour in the business sector,” she said.

With rising prices and labor incomes, some economists believe the Federal Reserve may decide it needs to tighten the money supply before inflation gets too high, indicating a likely interest rate hike later on Wednesday.