It should come as no surprise to learn that headline inflation continues to creep higher. The Federal Reserve has been aiding and abetting this trend for some time now, as these pages have long suggested.
This morning’s update on consumer prices advises that inflation is now running at a 3.5% annual pace through last month–the highest in over a year. As our chart below suggests, the trend of higher inflation looks like more than a temporary blip. After bottoming out at a 1.3% annual rate in October 2006, pricing pressures have been on the march upward ever since.
Yes, the core rate of inflation (which the Fed favors as a gauge for monetary policy) looks better, although questions on this front abound too. Stripping out energy and food reveals an annual rate of inflation through last month at 2.1%, unchanged from September. It’s unclear if core CPI’s sideways behavior of late is a prelude to a fall or a rise. Much depends on what the Fed does in the coming months.
That said, the Fed seems inclined to err on the side of more liquidity these days, and that may be the deciding factor for 2008. Indeed, as we noted on Monday, nominal M2 money supply is rising at a rate well above GDP’s nominal pace, a trend supported by the drop in Fed funds since September.