A Resurgence of Inflation

The Federal Reserve met on March 20 and 21.  Minutes of the meeting reveal an increasing concern about rising inflation.

At that meeting all of the Fed policymakers were in agreement. Inflation is on the rise.

As measured by the Consumer Price Index, year-over-year inflation in the U.S. rose by more than 2% in every month from September through February. The same is true of inflation measured by the Producer Price Index.  Furthermore, the PPI exceeded 4% in November. These are the most recent numbers available.

“All participants agreed that the outlook for the economy beyond the current quarter haw strengthened.  In addition, all participants expected inflation on a 12-month basis to move up in coming months.”

Because the economy and inflation have strengthened, the Fed has upped the schedule for interest rate hikes.  It sees at least another two hikes this year.  In addition, quarterly forecasts at the last meeting showed more officials than in December were supportive of three more hikes in 2018.

Meanwhile, the meeting minutes showed that already some Fed officials worried the central bank would have to move faster than previously expected.

A number said the outlook for the economy and inflation could lead to a slightly steeper path of rate increases over the next few years.  Furthermore, some even suggested that at a given point the Fed might have to move to a neutral or “restraining factor” for economic activity.

Fed Reserve Chairman Jerome Powell sounded a cautious, if slightly misleading, tone.  Powell told reporters last month that there were no signs that inflation is accelerating.  Fresh data Wednesday showed Powell’s assertion is still correct, but just barely.  It is technically correct that inflation is not “accelerating.”  Nevertheless, it definitely is “simmering.”  This according to Sal Guatieri, senior economist at BMO Capital Markets.

Earlier the Fed had projected inflation would reach 2% by 2019.  Now it appears that this level of inflation has been reached much earlier than expected.

Almost all Wall Street economists think the CPI data show further rate hikes are appropriate.  Furthermore, many see the Fed moving rates up four times this year.  This would be a slightly faster pace than the three moves the Fed had penciled in.

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