As per an overview of U.S economy during the last week, all indicators point towards nearly full employment giving a signal to an inflation increase above 2% to what Federal Reserve put in as target. So what’s for Janet Yellen to look further into in this regard?
Inflation rate has been on declining mode from 2% in four years timespan – quite evident why FED kept an easy monarchy. For another two years, FED does not sight an inflation rebound to 2%. However, Six months ago, inflation barely had a pulse, hiking at just 0.2% over an annual estimate. Currently, the personal consumption expenditure price index — the FED’s preferred measure of inflation — is at 1.25%, despite of BEARISH energy costs.
UPDATE: Inflation is rising at a 1.25% rate/annual scale since the past 12 months.
Upon that a query rises: Why inflation is marking an indicated rise? An answer might be due to various numbers of jobs – as what an economic theory suggests:
“When an unemployment rate gets BEARISH, workers gain bargaining power and are able to command BULLISH wages (the demand for labor is higher than the supply).”
A comparison of the above theorized concept with current financial goes the same; employers must raise wages to keep good employees, and then they must raise their selling prices in order to pay those wages (Concept: Philips Curve). The same strategy what FED has been opting since 50 years within it monetary frame.
The Fed tries to keep the unemployment rate just above the level that would fuel inflation. That level is known as the nonaccelerating inflation rate of unemployment, or NAIRU (as per Market Watch).
However, inflation could not be defined with that accuracy by anyone. There’s one beheaded issue in this theorized statement; it might seem reasonable on chalkboard but the empirical evidence proves it isn’t that affective practically -NAIRU seems to change over time. Sometimes it seems that NAIRU is above 6%. Presently, it appears to be less than 5%. Least it could go at 3%. Council of Economic Advisers suggests NAIRU to even fall to as lower as zero in figures.
In this case, FED might be doing the same – it’s letting the economy run by itself. It might be looking for a valid justification to feel obligated in slamming on the brakes. No doubt, They’ll cautiously raise rates away from zero but maintain accommodative policy for a while longer, especially with risks of global contagion rising. But what about the spike in the *PCE price index in the past few months? Certainly, that refers NAIRU has been knocked down! Isn’t it time to get serious about raising rates? Upon raising this query in front of FED Chairwoman, Janet Yellen, she decided not to be convinced upon it:
“Given that the economy is now close to our maximum employment objective, hopefully inflation is moving up. As you mention, recent readings on inflation have moved up. There may be some, you know, I want to warn that there may be some transitory factors that are influencing that.”
(*The recent spike in the PCE index has been driven by unusually large price increases for goods such as apparel, jewelry, motor vehicles, and drugs, and for services such as air fares, school lunches, tickets for spectator sports and banking fees)
For one thing sure, inflation is a general and sustained increase in costs, and ofcourse not just temporary increases or decreases for a few goods and services. What the FED cares about, what global financial markets care about, is tranquility within inflation.
In short, FED would make merry if it could get inflation back to 2% any time soon.