Implications: Today's report on consumer prices again shows no signs of deflation. Consumer prices are now up for three straight months at a 2.7% annual rate. Like last month, most of the gain was due to energy prices. Given higher oil prices again so far in October, look for another increase in the CPI next month. "Core" prices, which exclude food and energy, were unchanged in September. Despite rising inflation in the last three months, consumer prices are up only 1.1% in the past year while core prices are up only 0.8%. So, although it is impossible to make the case that we are suffering 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 16 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."
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