Domestic inflation keeps the Fed on track
Domestic inflation keeps the Fed on track
WASHINGTON. A widely observed price index suggested on Monday that, for now, inflation represents a small threat to the economy.
The price index for personal consumption expenses rose 0.1% in September since August, the Commerce Department said on Monday. That marked the fourth consecutive month in which the preferred inflation indicator of the Federal Reserve did not reach the monthly rate of 0.165% needed to meet its annual target of 2%.
For Federal Reserve policy makers who weigh how much more to raise interest rates, the data underscore an evolutionary view that the lowest unemployment rate in nearly five decades may not be creating excessive inflationary pressures. If inflation remains under control, it could reinforce the case to suspend the rate increases at some point in the coming months.
The Commerce Department also said that Americans increased their spending in September and that their revenues increased, a positive sign that the main engine of the economy was heading into the fourth quarter. Consumer spending represents more than two thirds of the economic activity of the United States.
Personal consumption expenditures, a measure of household spending, increased by 0.4% adjusted in the season in September compared to the previous month. Personal income, reflecting the pre-tax earnings of Americans' salaries and investments, rose 0.2%.
In annual terms, personal consumption expenses and other price indices are close to the Fed's 2% inflation target, but have moderated slightly in recent months. The trend has coincided with a strengthening of the dollar, as a result of the rise in interest rates and solid economic growth in the United States, which has kept prices of a variety of products low, economists say. That has more than compensated for a steady increase in the prices of services, which are less susceptible to the downward pressure of cheaper imports.
Traditional economic models suggest that inflation could accelerate, as a tight labor market forces employers to raise wages and then prices, as they did in the 1960s and 1970s.
But recent speeches by Federal Reserve Chairman Jerome Powell and other central bank officials have focused on the importance of inflation expectations, rather than models. In general, they believe that future inflation expectations of consumers and businesses can become self-sufficient. If those expectations remain anchored, it is thought, prices should not spiral up out of control.
"Like the role of [labor-market] "The lack of explanation for inflation has decreased, inflation expectations have become more important," said Randal Quarles, vice president of supervision of the Fed, said on October 18.
Fed officials raised their federal funds reference rate last month in a range between 2% and 2.25% and they said that they hope to raise it gradually in the coming years to prevent excessive inflation or financial instability. Its median projection raised the rate by 1.25 percentage points until the end of 2020.
A minority of Fed policy makers say the central bank should delay further rate hikes this year.
"Until inflation or inflation expectations rise significantly, the Fed should allow the economy to continue to strengthen, to allow as many Americans as possible to participate in the recovery," wrote Minneapolis Fed President Neel Kashkari. it's a statement. Opinion article of the Wall Street Journal last week.
Most Fed officials think it would be risky. Policy changes can take months or even years to affect inflation. They also point out that the rates are still relatively low, while economic growth is strong.
Monday's report on personal income and spending pointed to a strong economic boost towards the fourth quarter, but if inflation seems to be consolidating above or below the target, policymakers could rethink their plans.
Richard Clarida, in his first speech as vice president of the Fed, he said last week that real and expected inflation will be fundamental for their political preferences next year.
"If the strong growth and strong employment gains continued in 2019 and were accompanied by a substantial increase in real and expected inflation, that circumstance would indicate to me that further normalization of the policy may be necessary beyond what I currently expect" said Clarida. Said, without detailing what you expect on the rates. On the contrary, strong growth and stable inflation "would argue against raising short-term interest rates more than I currently expected."
Corrections and Amplifications
The unemployment rate is the lowest since 1969, or almost five decades. An earlier version of this article incorrectly said that unemployment was the lowest in almost four decades. (October 29, 2018)
Write to Paul Kiernan in paul.kiernan@wsj.com and Sarah Chaney in sarah.chaney@wsj.com
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