Now that the worst of the global recession seems to have come and gone, central banks all over the world are thinking about pulling their stimulus programs out of the economy. While some central banks, such as the RBA, have been more aggressive with their exit strategies, others have been more cautious. The US Fed, in particular, has been holding on to an “extended period” of low interest rates, prompting many to fear that this could eventually result to uncontrollable inflation.
But according to Fed hotshot Jeffrey Lacker, the central bank is on its toes and is careful not to allow any sudden spikes in prices. Although inflation remains subdued, recent data from the US show that their economy is seems to be back on track.
The 0.3% rise in February retail sales suggested that the US is getting back on its feet at least for the month. The core version of the report, which showed a gain of 0.8%, confirmed that business activity during the period has indeed picked up. The core durable orders also told the same story. Orders in February increased by 0.9% after sliding by 0.6% in January. A hike in orders indicates that manufacturers could be gearing up for an expected jump in business activity.
Despite the increase in consumer and business activity, inflation remained in check. The headline CPI was flat in February while the core version of the index grew by only 0.1%. The core personal consumption expenditure price index, which is actually the Fed’s preferred gauge of inflation because it takes into consideration the prices of preceding periods, also held steady at 0.0%.
March’s inflation figures are expected to post an uptick. Still, the increase in prices last month should not warrant any fears of inflation getting out of hand since both the headline and core consumer price index are only projected to have risen marginally by 0.1%.
Based on this information, I think its safe to assume that inflation won’t be going anywhere soon. Recall also that the US economy hardly experienced inflation even before the end of the Fed’s mortgage-backed securities buy-back program last March 31.
And even if the CPI figures come in much higher than anticipated, I’m more inclined to believe that the central bank will sing the “one doesn’t make a trend” tune until an actual trend does develop in inflation. The Fed has stood still with its “wait and see” stance, taking good and bad economic data in stride.
Why worry anyway? Inflation will be good in a time like this. In fact there has been rumor going around that the Fed could raise its inflation target from 2% to 4% in the next few years. In theory, this will allow the Fed with more room to move in terms of monetary policy and let inflation rise a bit to make it easier for the US government to pay off its humongous debt.
How about wages? Although it’s true that the real income of employees will fall with high inflation, it is a welcome sacrifice for the greater good. Lower wages would encourage businesses to hire more, which will eventually lead to a decrease in overall unemployment.
For now, look for Ben Bernanke and the rest of his Fed posse to look for concrete evidence before they start firing their rate hike guns to fight inflation.