Balancing Inflation and Growth Part 10 of 13

There was a time, back when I was an outside observer of the Federal Reserve, when commodity future option trading the Fed practiced what some have dubbed opportunistic disinflation. Beginning in the mid-1980s, the FOMC recognized that while recessions sometimes occur, they could not be anticipated with any precision and that by the time the data revealed a recession, it was too late to do much about it, given the impact lags of monetary policy. The FOMC also recognized that the trend rate of inflation generally fell by about a percentage point or more following a recession. Put it all together and you get opportunistic disinflation, or the idea that if recession comes, make the best of it by bringing down the inflation rate.

This was a period of persistent disinflationand, I might add, a period during which the U.S. economy experienced only two short and mild recessions, a total of 16 months over almost 25 years. Over this same period, the inflation rate declined inexorably, reaching a point where the FOMC had to deal with the threat of deflation in 200304. It was also the period when the Fed made the largest gains in its policy credibility and commodity trading education.

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Balancing Inflation and Growth Part 9 of 13

Recent readings on inflation have not been encouraging. The rate of increase in the core personal consumption expenditures price index, or core PCE that is, what people buy, except food and energy was 2.2 percent over the 12 months ending in January. Yet, its headline counterpart commodity index trading, which includes food and energy, increased an alarming 3.7 percent over the same time frame. Both core and headline PCE figures have been following an accelerating trajectory over the past several months. If you annualized the change in the PCE over the most recent three-month period, for example, you’ll notice that the core rose 3 percent, while headline rose 5.4 percent.

Clearly, food and energy prices matter, as these differences make clear. The price index for food rose 4.7 percent over the past 12 months, a rate not seen since 1990. Through January, the PCE energy component was up roughly 23 percent over 12 months.

While some of the movement in core consumer price inflation represents pass-through of high energy prices to transportation services, for example we have also seen commodity derivative trading pickups in other components, such as recreation, education and personal care services, and upticks in components, such as apparel, that have historically exerted downward pressure on the price of the consumers basket of goods.

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