Economic Snapshot | Retirement

Evidence doesn’t support inflation fears

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Snapshot for May 3, 2000

Evidence doesn’t support inflation fears

For the past year now the Federal Reserve has been raising interest rates out of a fear of inflation. To look at only the consumer price index, which has accelerated notably since early 1999, such fears might seem well founded. (See figure below). But when the core CPI — that is, the CPI without food and energy — is used as a measure for these fears, the acceleration in prices is much less significant. The divergence of the two series is the result of actions by the OPEC cartel that have driven up energy prices in the past year. Once the impact of oil is removed from the price index, the recent uptick is quite mild, with core inflation increasing by just over 2%.

Based on these trends, there is no evidence of price pressures in the core CPI. Since the tactics of OPEC are arguably beyond the reach of monetary policy, these trends do not offer a compelling rationale for the Federal Reserve to raise interest rates. Of course, the Fed could (and does) argue that rate hikes now will stave off future price pressures, but as of yet, the tight labor market has not led to an acceleration of core prices.

Source: Bureau of Labor Statistics price reports.

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