Inflation Flare Up Frightens Fed

Federal Open Market Committee (FOMC) participants gather at the William McChesney Martin Jr. Building in Washington, D.C., for a two-day meeting held on March 15-16, 2022. Please note: Confidential documents seen in this photo have been obscured. Photo courtesy of the Federal Reserve.

You have probably been watching the Fed’s actions with suspicion as it lowers rates despite continued above “target” inflation numbers. Jerome Powell and other Fed officials have explained that the momentum of disinflation is strong enough to continue to bring prices down even with rate cuts. Despite Powell’s assurances, inflation remains stubbornly high. In the latest release, core inflation, which excludes food and fuel, even accelerated in September. The Wall Street Journal’s editorial board explains:

The September price data released Thursday put a statistical gloss on what voters already know: Inflation remains persistent. This is an October non-surprise in this presidential election year, and perhaps an uncomfortable moment for Federal Reserve Chairman Jerome Powell.

The headline consumer-price index increased 2.4% year-on-year in September, a slight deceleration in the rate of price increases after the 2.5% reading for August and 2.9% in July. But the so-called core measure, excluding food and energy, remains stubbornly high—3.3% in the latest data, 3.2% in August, 3.3% in June, 3.4% in May and so on. As long as the inflation rate is positive, prices are increasing. This at a time when inflation-adjusted weekly earnings remain well below their January 2021 level, despite recent improvement.

Some economists say chronic problems measuring housing costs make inflation appear higher than it is, which may be true. The Fed prefers an entirely different data series, personal-consumption expenditure, which has indicated a core inflation rate below 3% in recent months.

But voters know how much they’re paying for eggs, auto insurance, electricity, children’s clothing, butter, haircuts, and other goods and services whose prices keep rising well above the Fed’s target of 2%. Any Democrat still confused about why Kamala Harris is in a tight race rather than cruising to victory against Donald Trump should mute the Wall Street talking heads on CNBC and go to a supermarket.

As for Mr. Powell, the inflation data highlight the risk he took last month when he cut short-term interest rates by 50 basis points. The Fed’s economic models led officials to worry the labor market may soften soon without lower rates, and meanwhile the same spreadsheets seemed to suggest inflation was on a glide path to 2%. This gave Mr. Powell scope to focus more on unemployment, though the minutes released Wednesday of the last Fed monetary-policy meeting show that some participants preferred a 25-point cut.

The Fed’s inflation prediction might still turn out to be true, and markets took Thursday’s data in stride on that hope. If Mr. Powell—and households—are lucky, inflation will resume its downward drift in the months ahead.

But those models didn’t predict inflation’s surge in 2021 and the Fed was nearly fooled by a false disinflation dawn early this year. There’s much the Fed and the rest of us don’t understand about this post-pandemic economy, but it’s too soon to say inflation is beat.

Action Line: Is the Fed sleepwalking into an economic whipsaw of higher inflation and declining employment? Only time will tell. But you need to prepare for the worst. When you want to talk about inflation and your investment portfolio, email me at ejsmith@yoursurvivalguy.com. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.