Macroblog Readers: Dave has offered me another opportunity to talk about the inflation numbers. Remember, you can't infer that these views represent him, the Cleveland Fed, or the Federal Reserve Board of Governors. Mike Bryan
Today’s PCE inflation report for December seems to have gotten a ho-hum response in financial markets. As it should. The data were tame and not widely off expectations. Besides, with only minimal error anyone with a pocket calculator should have been able to guess this monthly number from the fourth quarter GDP data reported last Friday.
The inflation trend, as measured by the PCE, seems to be skirting just below two percent, the upper bound of what one FOMC member, Janet Yellen, is reported to have called her “comfort zone” for the inflation measure (one percent to two percent.) The trimmed-mean PCE price measure produced by the Dallas Fed is running a bit higher (2.2 percent over the past twelve months), but like the more traditional core, is holding relatively steady in the face of soaring energy costs earlier in the year.
Tomorrow the monetary policy committee meets to discuss these and other numbers that gauge the health and inflationary propensity of our economy and to say goodbye to one of the worst friends inflation ever had—Alan Greenspan. When he took the helm of the FOMC in August 1987, core PCE inflation was running around 3 ¾ percent. In the early 1990’s, the inflation trend was reduced further—to around 2 percent—and has since shown little inclination to deviate from that lower trend. In fact, if you insist on some science, my colleague Pat Higgins ran a statistical test of the available core PCE data this morning and was unable to identify a clear structural break in them since April, 1992. In other words, the core PCE seems to have been anchored to a 1.9 percent trend for 14 years now—a record that seems all the more remarkable given the rough terrain the economy has traversed since 1992.
But maybe it isn’t so remarkable. Maybe the relatively steady inflation path we have followed gave the institution an extra tool—an added flexibility that it could use to help the economy through that rough terrain. With this flexibility, it could respond to economic exigencies without sacrificing its credibility to deliver on low inflation. Let me put it this way: “[T]hrough two decades of effort the Fed has restored its credibility for maintaining low and stable inflation, which--as theory suggests--has had the important benefit of increasing the institution's ability to respond to shocks to the real economy…without any apparent adverse effect on inflation expectations.” OK, those aren’t my words. Those are the comments of former Fed Governor and apparent incoming Fed Chair, Ben Bernanke. I only wish I had said them.