by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Memo to Janet Yellen & Co.:
In light of the September consumer price index released Thursday, might this be a good time to announce the long-awaited hike in the federal-funds rate at the meeting scheduled next week?
True, the all-items CPI fell for the second month in a row, and the 12-month change through September came in at zero, much below your 2% objective for price inflation. But that was due to the transitory plunge in the energy component, down 18.4%.
The CPI, excluding energy, had a 12-month rise through September of 1.9%. That is surely close enough to your 2% objective, especially given the huge range of error on all price indexes. ,,,
… Let’s hope energy prices stay low. All they have to do is stop falling, and sooner or later the 12-month change on the energy component of the CPI would rise to zero. So with the food component of the CPI up 1.6% through September, and assuming some rebound in import prices, a 2% CPI seems about as sure a bet as anything can be in this economy.
You have made it known that, while you do consult the CPI, your favorite flavor among these price indexes is the personal consumption expenditures deflator, which tends to rise more slowly than the CPI. In the five years through August, the most recent month for which data are available, the PCE deflator rose at an average annual rate of 1.5%.
Since the past five years have seen pretty consistent economic growth, why not make 1.5% your new goal? The six-month gain on the core PCE deflator has been running at an annualized 1.6%. So there, too, you could claim victory. …
… Other downside distortions resulted from the unusually sharp decline in gasoline prices. Nominal retail sales, excluding those of gasoline, rose noticeably, but even that figure might be too low. The reason is that the data on general merchandise sales leave out the fact that these merchandise stores also sell a lot of gasoline.
Based on retail sales, together with the fall in goods prices, real consumer spending in the third quarter probably rose at an annualized 3.5% or better. The idea that cautious consumers aren’t spending the windfall from cheap energy doesn’t seem to hold up.
So, perhaps it’s past time to end what The Wall Street Journal has properly dubbed “Fed fatigue,” and start the process of bringing interest rates back to normal.