Implications: For now, Ben Bernanke is smiling because all is quiet on the inflation front. Consumer prices fell 0.3% in November, falling short of consensus expectations and are up only 1.8% from a year ago. "Core" prices, which exclude food and energy, were up only 0.1% in November, also coming in lower than consensus expectations, and are up 1.9% from a year ago. Neither figure sets off alarm bells. Instead, they suggest the Federal Reserve's preferred measure of inflation, the PCE deflator (which usually runs a ΒΌ point below the CPI) remains below the Fed's target of 2%. We don't expect this to last. With nominal GDP growth – real GDP growth plus inflation – running at 4%+, a federal funds rate at essentially zero will generate higher rates of inflation in the year ahead. Look for housing, which makes up about 30% of the CPI, to be a large contributor to higher inflation in the next few years. It's important to recognize that the Fed will not start raising rates just because inflation gets above its target of 2%. For the Fed, the key measure of inflation is its own forecast of future inflation. So even if inflation goes to roughly 3% next year, as long as the Fed projects the rise to be temporary it will not react by raising short-term interest rates. The Fed is more focused on the labor market and, we believe, is willing to let inflation exceed its long-term target of 2% for a prolonged period of time. The best news in today's report was that real average hourly earnings rose 0.5% in November, the largest rise since December 2008. This, as well as job growth and low financial obligations by households, will help support growth in consumer spending in the year ahead.
Click here for a PDF version.
|
|
Posted on Friday, December 14, 2012 @ 9:50 AM
|