Suitably Flip

Here's Your Economy, Sir. Watch Out, The Inflation Is a Little Hot.

Yesterday, I discussed the relative tameness of the newly released wholesale inflation data.

Today, with the release of the retail inflation data, the story is slightly different.  Month-over-month core inflation came in at 0.3%, a touch hotter than expectations.  The headline number, including food and energy, notched 0.6%, also ahead of forecasts.  Year-over-year, core inflation hit 2.3%.

Wall Street is displeased.  The market indices are down more than 1%, extending the week-long ugliness, as investors got increasingly nervous that signs of inflation creeping up will encourage the Fed to hike rates at multiple additional meetings.  Even Hewlett-Packard's superb quarter wasn't enough to salve the burn of hotter than expected inflation.

As I've said before (and as I was wrong about in re the May meeting), I don't buy that Bernanke will embark on a blindly hawkish campaign to thwart inflation at all costs, including sparking an economic downturn.  We know that, in addition to core inflation, he looks carefully at the housing market, which has begun to cool, first in terms of sales volume, then in inventories, and now finally in average prices.

To know when to stop, however, the Fed has to weigh how far they can go without unduly crimping economic activity.  Given the Goldilocksishness of our current economy and the brisk pace of GDP growth, this may be harder to pick up on.  Since we're starting with such a robust and healthy economy, by the time there are signs of an interest rate-driven slowdown, we may in fact have been unnecessarily restraining growth for months.  Oversteering the ship this time around has the potential to derail a sustained period of consistently strong, broad-based economic growth.

(I learned to mix transportation metaphors from Austin Powers.)

Instead, I'm hoping Bernanke will bear in mind the neutral rate school of thought which he was largely expected to espouse during his Fed tenure.  Assuming he does, I can't imagine he feels a neutral rate for the fed funds rate would be meaningfully north of the current rate of 5%.

The Fed spooked investors last week with the release of their May policy statement, which seemed to leave open the possibility for an unspecified number of follow-up hikes.  Hopefully, we'll get some additional clarity into the FOMC's state of mind with the release of that meeting's minutes at the end of this month.

Previously:  Tameish Inflation Numbers

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Here's Your Economy, Sir. Watch Out, The Inflation Is a Little Hot.

Yesterday, I discussed the relative tameness of the newly released wholesale inflation data.

Today, with the release of the retail inflation data, the story is slightly different.  Month-over-month core inflation came in at 0.3%, a touch hotter than expectations.  The headline number, including food and energy, notched 0.6%, also ahead of forecasts.  Year-over-year, core inflation hit 2.3%.

Wall Street is displeased.  The market indices are down more than 1%, extending the week-long ugliness, as investors got increasingly nervous that signs of inflation creeping up will encourage the Fed to hike rates at multiple additional meetings.  Even Hewlett-Packard's superb quarter wasn't enough to salve the burn of hotter than expected inflation.

As I've said before (and as I was wrong about in re the May meeting), I don't buy that Bernanke will embark on a blindly hawkish campaign to thwart inflation at all costs, including sparking an economic downturn.  We know that, in addition to core inflation, he looks carefully at the housing market, which has begun to cool, first in terms of sales volume, then in inventories, and now finally in average prices.

To know when to stop, however, the Fed has to weigh how far they can go without unduly crimping economic activity.  Given the Goldilocksishness of our current economy and the brisk pace of GDP growth, this may be harder to pick up on.  Since we're starting with such a robust and healthy economy, by the time there are signs of an interest rate-driven slowdown, we may in fact have been unnecessarily restraining growth for months.  Oversteering the ship this time around has the potential to derail a sustained period of consistently strong, broad-based economic growth.

(I learned to mix transportation metaphors from Austin Powers.)

Instead, I'm hoping Bernanke will bear in mind the neutral rate school of thought which he was largely expected to espouse during his Fed tenure.  Assuming he does, I can't imagine he feels a neutral rate for the fed funds rate would be meaningfully north of the current rate of 5%.

The Fed spooked investors last week with the release of their May policy statement, which seemed to leave open the possibility for an unspecified number of follow-up hikes.  Hopefully, we'll get some additional clarity into the FOMC's state of mind with the release of that meeting's minutes at the end of this month.

Previously:  Tameish Inflation Numbers