U.S. Inflation Undershoots the Fed’s 2% Target for the 35th Straight Month – Real Time Economics

It’s now been nearly three years since U.S. inflation hit the Federal Reserve’s 2% target, according to new data from the Commerce Department.

The personal consumption expenditures price index, the Fed’s preferred inflation gauge, rose just 0.3% in March from a year earlier, the same increase as the previous month, the Commerce Department said Thursday.

That was the 35th consecutive month that inflation has undershot the Fed’s goal.

The oil price crash, a strong dollar and weak overseas economies have all kept inflation at bay. But some slack in the U.S. economy may also be keeping prices muted.

Excluding the volatile food and energy categories, prices climbed 1.3% in March from a year earlier for the fourth consecutive month.

The Fed has two mandates: maximum employment and price stability. The two aren’t at odds, at least for the moment, but we’re getting closer.

Fed Chairwoman Janet Yellen in April
ANDREW HARRER/BLOOMBERG NEWS

In projections released last month, Fed policy makers lowered their estimate of the longer-run jobless rate to a range between 5% and 5.2%. That threshold represents what some economists call the nonaccelerating inflation rate of unemployment, or Nairu. In English, it’s the lowest unemployment rate that won’t stoke inflation.

But inflation isn’t even close. Some central bank officials have flagged low inflation as a concern, but most say the weak readings are likley due to temporary factors–such as lower oil prices–and they eventually expect it to move back toward 2%.

Fed officials have said they want to see inflation moving toward their target before raising interest rates. But Fed Chairwoman Janet Yellen said last month that “policy makers cannot wait until they have achieved their objectives to begin adjusting policy.” Waiting too long could lead to overshooting on both mandates, and encourage risky behavior by investors, she said.

In a statement Wednesday, Fed officials reiterated that they expect inflation to gradually return to its 2% objective “as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.”

Related reading:

U.S. Consumer Spending Cautiously Increases

U.S. Economic Growth Nearly Stalls Out

Slowing Growth Muddles Fed Plans

The Fed Doesn’t Think the U.S. Economy Is at Full Employment, After All

Greg Ip: Why Isn’t the Fed More Worried About Inflation Expectations?

Persistent Low Inflation Hurts Fed Credibility, Evans Says

Fed’s Kocherlakota Worried Too-Low Inflation Could Persist for Years

 


 


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30 April 2015 | 3:27 pm – Source: blogs.wsj.com

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