How much lag resides in the lagging indicator known as core CPI? It’s a potent question on a day when the Labor Department reported that the core rate of inflation (less food and energy) in June rose by 0.3%–the fourth straight month at that pace, which is above the Fed’s comfort zone. On a year-over-year basis, core CPI has now climbed by 2.6%, the first time the rate of increase has topped 2.4% since 2002, MSN Money reported.
“With 2.6% year over year, it is a number that’s way too hot for the Federal Reserve,” Anthony Chan, chief economist of J.P. Morgan Private Client Services, told CNBC’s “Squawk Box.” via MSN Money. “It’s certainly out of the comfort zone.”
Against the backdrop of that worrying trend were comments from Fed Chairman Bernanke, who today told Congress that the economy was slowing and inflationary pressures would therefore moderate going forward. If there was any question about Bernanke’s message that the past isn’t necessarily prologue when it comes to inflation, he offered this clarification: “The lags between policy actions and their effects imply that we must be forward-looking, basing our policy choices on the longer-term outlook for both inflation and economic growth,” he said, as reported by Bloomberg News.
Core CPI is, of course, a lagging indicator. Indeed, all economic data is lagging in the sense that it reflects yesterday’s trends. The question is how to project tomorrow from yesterday. It’s a thankless job, and one that economists tackle routinely, albeit it with less than perfect results. That’s the nature of forecasting, an art form that only slightly resembles science. The future, dear readers, is forever and always unknown.
Having proclaimed that revelatory observation, your editor is back to square one, namely, Now what? To be sure, we come neither to praise nor to bury core CPI, but to point out what should already be obvious: inflationary pressures have been bubbling in the recent past, raising the odds but not necessarily insuring that inflationary pressures will bubble in the near future.
If the Fed feels compelled to snuff out this bubbling, the message was somewhat garbled by Bernanke. “Bernanke’s comments on inflation make it seem [that] the Fed is really getting close to the end of its rate-hike cycle,” Jason Schenker, U.S. economist at Wachovia Corp., told Reuters today. “That is more than enough to give stocks a boost.”