Inflation Numbers Give Fed Green Light

11/25/2011 6:30 am EST


Jim Jubak

Founder and Editor,

Last week’s numbers on both producer and consumer prices give the Fed the flexibility to act more aggressively if they decide it is necessary, says MoneyShow’s Jim Jubak.

Good news. There is no inflation in the United States.

Well, that’s not quite true, but there is good news on what’s called the headline inflation number. This is the CPI that all of us watch.

In October, the Bureau of Labor Statistics says that it actually declined by 0.1%. The reasons for this make the number a little less credible, because it’s got to do with how they measure gasoline costs and what week they used…

But anyway, there was a big spike in fuel costs in September that was a statistical anomaly, and the drop in October is because it’s a drop from that artificially high level in September, but what it really means is you can’t draw a trend line and say oh, we’re going down. But what you can do is say, "Hey, it looks like there’s no really bad inflation."

You can see that in what’s called the core inflation number, which is the number that takes away food and fuel—because after all, we don’t need to eat and we don’t drive cars, so those don’t really count. Anyway, this number, which is the one that’s closer—what the Fed watches—says that inflation on an annualized rate is about a little over 2%, 2.1% or something like that.

The Fed really would like to keep inflation under 2%…1.7% to 2% would be a decent target. So at 2.1%? Hey, we’re in pretty good shape, and that’s important because the Fed is trying to decide, well, can it do a third round of quantitative easing? Does it need to raise rates? Can it leave interest rates where they are?

It’s made a pledge to keep interest rates low. Its benchmark rate stays at zero or so until the middle of 2013. From these numbers, there’s no danger in that pledge. They can keep it there because there’s no sign that inflation is about to rear up and bite us all.

They can contemplate doing something to stimulate the economy, because again there’s no real sign of a problem, and also because there is some inflation, they don’t really need to worry about deflation. That doesn’t seem to be an issue on the table. Although a lot of people out there in the financial community seem to be worried about it all the time.

So what this really does is it lets the Fed have a lot of room for policy without worrying too much on either end—well, to the degree that there is anybody watching over the economy and able to do anything. Congress certainly can’t, the President certainly can’t…or maybe can’t is the wrong word. Maybe won’t in the case of Congress.

The Fed is the only game in town and therefore it’s really pretty good that the Fed has got a little bit of wiggle room around the edges of what amounts to a really, really tough economic situation.

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