Everything is a Cause for Worry About Inflation

(cc photo by Paraschiv Alexandru)

(cc photo by Paraschiv Alexandru)

Inflation continues to be very low. But here’s how Daniel Costello reported it from Planet Money:

The core PPI – which excludes food and energy prices – rose 0.5% in November, more than expected. Leading the advance: truck and cigarette prices. Core prices are up 1.2% over the past year.

The news is unlikely to change the Fed’s decision on whether or not to keep interest rates at a record low Tuesday. But it does add to concerns the central bank’s loose monetary policy could lead to greater inflation and new asset bubbles down the road.

In 2008, the CPI increased 0.1 percent, way below the Fed’s 2 percent implicit target. In 2009 thus far, the CPI is set to increase by a number that’s higher than that, but still below the implicit target of 2 percent. So why, logically, would an increase from “way below target” to “somewhat below target” spark a concern about inflation? It would take a year or two of inclation above the target rate for the price level to return to its long-run trajectory. I doubt that if we had a year of 3.9 percent inflation followed by a year of 2.6 percent inflation that you’d hear people saying the Fed was worried about deflation. They’d say the Fed was glad things were getting closer to the target.