Implications: Today's report on consumer prices again shows no signs of deflation. In the past three months, consumer prices are up at a 2.4% annual rate. Like the previous two months, most of the gain in October was due to energy. "Core" prices, which exclude food and energy, were unchanged in October and have been essentially unchanged in the past three months. Despite higher energy prices, overall consumer prices are up only 1.2% in the past year while core prices are up only 0.6%. So, although we don't have deflation, inflation has not yet become a serious problem either. However, the linkage between monetary policy and inflation is a long one, taking at least a year, possibly two. It was not until 17 months ago that the US economy emerged from a recession where nominal GDP growth – real GDP growth plus inflation – was negative. So it was only then when the policy of, essentially, zero percent interest rates became loose. Now that the economy is growing consistently and prices are rising, Fed policy is getting looser by the month, even without any additional round of "quantitative easing." Inflation will be up significantly in 2011.
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