Friday, August 11, 2017

July Inflation Is Soft Again But Fed Seems Intent On Raising Rates

In the wake of another positive employment report for July, with over 200,000 new jobs created and average hourly earnings up by 9 cents, it appears that the Fed is prepared to continue with its planned rate hike or even hikes before the end of the year. But today's inflation numbers might want to make them think a little harder about that plan, even though it is doubtful they will.

The CPI came in at a 2.0% annualized rate, CPI less food and energy is at 1.7%, and Core CPI was at 1.4%. All of these numbers are incredibly soft and, in fact, there is only one inflation measure that exceeds the Fed's 2% target, and remember, that is just a target.

According to Minneapolis Fed President Neel Kashkari, the other Fed members have this unsubstantiated belief that higher hourly wage growth is signifying a sudden outburst of inflation. Kashkari, who has dissented from the last two rate hikes, calls this a "ghost story". He said, "there is no evidence in any of the data that wages have this acceleration factor and are all of a sudden going to take off...We’ve been around ...a 1.7% [inflation rate]. If inflation starts to climb and we end up at 2.3% or 2.4% or 2.5%, so what." Adding to Kashkari's point is that fact that the Fed's inflation estimates have overshot reality every single year since the economy stabilized in the wake of the Great Recession.

As I've said many times before, the Fed has spent the last 30 years fighting the inflation wars of the 1970s. Since then, of course, the Fed starts raising rates at the first sign of wage growth, causing wages to stagnate, and sending inequality skyrocketing. When it comes to inflation, the target has become a ceiling and workers have suffered for that policy for the last few decades.

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