Fed’s Easy Money Policy Gets a Green Light From Low Inflation

The Consumer Price Index for All Urban Consumers, a proxy for inflation, decreased a seasonally-adjusted 0.4 percent on the month in April, slightly more than estimates for a 0.3 percent decline. This decline decelerated year-over-year growth in the headline CPI index from 1.5 percent to 1.1 percent.

This is the second period in a row that the headline rate has been negative. The overall index has been pulled lower primarily by large declines in energy, which was down 4.3 percent in April following a 2.6 percent decline in March. Food climbed 0.2 percent in April following no change in March.

The core index, which excludes typically volatile food and energy prices, climbed 0.1 percent on the month, slightly below estimates for 0.2 percent growth. On the year, inflation growth in the core index slowed from 1.9 percent in March to 1.7 percent in April.

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Both rates remain well below the Federal Reserve’s speed limit of 2.5 percent, meaning that the Fed is free to keep monetary policy loose and accomodative.

Consumer Price Index2

Source: Bureau of Labor Statistics

While the all items index has increased 1.5 percent over the past 12 months, the gasoline index has come down 8.3 percent over the same period. Lower gasoline prices should be good for consumer confidence, particularly as warmer weather encourages more driving.

CPI-U Index2

Source: Bureau of Labor Statistics

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Speaking on the U.S. economic outlook and monetary policy earlier this week, Federal Reserve Bank of Philadelphia President Charles Plosser began by saying that “preserving price stability is the most important function of a central bank.” The Fed’s massive quantitative easing program has caused concerns over price stability, and hawks have kept a careful eye on the rate of inflation, but as it stands, it looks like pressures remain low.

Plosser — critical of current policy — points out that over the past three years, average personal consumption expenditures inflation in the U.S. has been about 1.8 percent, and has been running at a slightly lower rate over the past four quarters. “At this point,” he said, “I do not see inflation or deflation as a serious threat in the near term. However, I do believe that our extraordinary level of monetary accommodation will have to be scaled back, perhaps more aggressively than some think, to ensure that inflation over the medium term remains consistent with our target.”

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