U.S. CPI: Fed’s Target Hit!

Not so long ago, the Fed had been lucky enough not to share the same worry as its other counterparts when it came to inflation. Central banks such as the BOC, RBA, and ECB were forced to hike interest rates to keep prices from rising. On the other hand, the Fed had it easy (in terms of monetary policy that is). Recall that the lack of inflationary pressures on the economy was one of the reasons why the central bank pulled the trigger on QE2.

But watch out kids! It looks like it won’t be long until we see the Big Ben take the same chill pill that other central bankers have been taking to get rid of their inflation-induced headaches. The stats for August show that inflation has already hit the Fed’s target! Duhn, duhn, duhn!

First things first, let’s take a glance at the inflation data for August. The headline CPI figure for the month beat forecasts for the first time in six months when it printed at 0.4%. Analysts had predicted a more modest increase of 0.2% to follow the 0.5% rise we saw in July. The uptick translated to a 0.2% increase in the annual CPI figure, bringing it up to 3.8% from the previous month’s reading of 3.6%. Graphing the numbers, we see that this is the highest figure we’ve seen since September 2008!

U.S. CPI August 2008 to August 2011

Digging deeper into the report, I noticed that food and energy prices rose during the month and may have contributed to the surge in the headline figure. Food prices are up 0.5% after increasing 0.4% in July. Meanwhile, we saw the second consecutive month of increase in energy prices, printing a 1.2% uptick following the 2.8% rise in July.

The core CPI, which excludes food and energy, came in just as expected and rose for the fifth month in a row when it printed at 0.2%. On a year-on-year basis, the core CPI is now up at the Fed’s target at 2%. Almost all the components included in the Fed’s survey increased during the month. For instance, the cost of rent rose by 0.4% while the prices of apparel posted a 1.1% uptick.

Whew! Okay, now enough with the numbers. Let’s get to the juicy part. What does the CPI report for August mean?

I bet policymakers over at Washington aren’t happy with the news. As if maintaining their popularity amid rising unemployment isn’t hard enough, they would also have to work on boosting confidence among Americans in the face of rising prices too.

With that said, I wouldn’t be surprised if politicians start bugging the Fed to come up with a solution to fight off inflation. Too bad for Bernanke and his buddies, this would probably mean that they will need to hold off their plans of launching another round of stimulus in order to boost growth. Keep in mind that prices of goods and services usually rise when the money supply increases. Aww! And Big Ben sounded so excited when he hinted the bank’s willingness to provide the economy with more liquidity in the most recent FOMC statement. Boo!

Well, one way that hotshots at the Fed could keep prices from rising would be to raise rates. However, as I pointed out, the economy’s anemic growth would most probably keep the Fed from taking a step towards a tighter monetary policy.

Now the central bank has this dilemma: Fight inflation and hike rates but risk growth? Or spur growth by providing stimulus and be exposed to inflation? Yikes! It sounds to me that the Fed is stuck between a rock and a hard place!

But doesn’t the Fed prefer to use the PCE to gauge inflation, you ask?

Yeah, I know. But c’mon, the CPI is at its highest in almost 3 years. Don’t you think that the report would at least keep the Fed from sounding too excited about providing the economy with more stimulus in the next FOMC statement?

2 comments

  1. Bizhub C350 Imaging Units

     
    Yo, an astonishing
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  2. Pascal

    I’ve heard an interesting opinion from Marc Faber – he thinks that officially Fed will not announce QE3, but it will be done silently… and who would be really surprised?

    Reply

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