Federal Reserve Is Missing Its Inflation Ambitions

The rate of inflation is measured by the Labor Department’s monthly Consumer Price Index (CPI). Despite Federal Reserve targeting to get inflation back up to a 2.0% to 2.5% range, the reality is that prices are still rather tame. The trillions of stimulus money may have just fought off deflation.

The CPI for September was shown to rise 0.2% from a month earlier on the all-items CPI. The core CPI reading, which is ex-food and energy, also rose just 0.2% over August. Econoday had both the headline and core CPI consensus readings at 2.0%.

Inflation is higher on the annualized readings, but still short of the Fed’s new goals. Headline CPI was up 1.4% from a year ago and the core CPI reading was up 1.7% from a year ago. Econoday had the consensus at 1.4% for the headline and 1.8% for the core annual readings.

The food index was 3.9% over the last 12 months but the energy index was down 7.7% from a year ago. Tuesday’s inflation report showed that the energy drop was led by gasoline (-15.4%) and fuel oil (-27.2%) on those annual readings, and there are secular concerns in oil and in gas.

The main driver for the little inflation that was seen was attributed as used cars and trucks continuing to rise sharply at 6.7% and accounting for most of the increase in the seasonally adjusted all items index. Food prices were more or less unchanged in October, as the “food away from home” index (restaurants) offset a decline in the “food at home” index. Prices in the energy index rose by 0.8% in September, led by a 4.2% increase in the price for natural gas.

Other areas of pricing in the economy were mixed versus August’s CPI report. The Labor Department reported that prices for shelter, new vehicles, and recreation increased in September. The indexes for motor vehicle insurance, airline fares, and apparel posted monthly declines in September.

Restaurants appear to be passing on those higher operating costs while they still are not operating at full capacity (and many are still close). The Labor Department said:

The index for limited service meals rose 0.9 percent in September, the largest increase in the history of the index, which dates to 1997. The index for full service meals rose 0.3 percent in September… Despite the September decline, the food at home index increased 4.1 percent over the last 12 months. All six major grocery store food group indexes rose over that span, with increases ranging from 2.6 percent (cereals and bakery products) to 6.3 percent (meats, poultry, fish, and eggs).

The Federal Reserve has so far done very little to actually push inflation up in the real economy. If it really wants to drive inflation up, it seems that it may have to target higher oil and gas prices because of their spillover effect on the final prices of goods in so many other items.

Targeting higher inflation may not be as simple as it sounds when economists jawbone their targets higher. And there is also the larger warning — be careful what you wish for, because you just might get it.