Today’s update on consumer prices could hardly send a clearer message: pricing pressure is rising, and it’s no longer just about energy. Food prices are now a problem as well. Having jumped 6.0% over the past 12 months, food is now advancing faster than overall consumer inflation.
The Federal Reserve can make a political decision to attack the beast or leave him be. If it’s the latter, the central bank can’t blame ambiguous data for consumer prices as the rationale.
Last month, headline CPI rose 0.8% on a seasonally adjusted basis. Yes, that’s down from June’s 1.1% surge, although that’s cold comfort once you realize that 0.8% is still near the highest monthly readings for the past 20 years. Even more troubling is the fact that CPI has climbed 5.6% over the past year through July, the likes of which haven’t been seen since the early 1990s.
But how about our fail-safe response that core inflation is still under control? That, too, is starting to look thin. CPI less food and energy prices advanced 0.3% last month, which translates to a 2.5% annual pace. The hope that core inflation would slip down to the 2.0% neighborhood has, for the moment, faded.

This is a critical change. Recall that 2.0% is widely reported as the Fed’s upper band of tolerance for core CPI. The fact that Bernanke and company have stomached annual core inflation above 2.0% for several years has recently been rationalized as a temporary oversight that would soon be corrected once the economy slows, which in turn would take the edge off pricing pressures.

Well, the economy’s slowed, and probably continues to slow. Based on today’s CPI report, however, the waiting game appears to be a failure on the inflation front. On the surface, the idea seemed reasonable–last year. Inflation, we were told, was merely a passing storm. The anomalous rise in CPI was due to factors beyond the Fed’s control, which is to say beyond the central bank’s influence via monetary policy.
Still, higher inflation can’t be ignored. What to do? Blame it on food and energy, and claim that the statistical noise emitted by prices in those areas is an unreliable source of inflationary signals for the future. True enough, at least that’s been the pattern in years past. But the conceit has always been that food and energy can be ignored only if prices for those commodities cycle, i.e., prices remain unchanged over a business cycle or two. If not, it’s a whole new monetary ball game.
Well, one can argue that the new game has begun, and in fact the new game has been unfolding for some time. Arguing otherwise requires hoping that core inflation will soon turn down, which is to say that food and energy prices aren’t in a secular bull market. Maybe next month.
Meantime, there’s a price to be paid for being wrong. If core inflation keeps rising, at some point the inflationary cat’s out of the bag. Are we at that point now? Is higher inflation generally now a done deal? Will the Fed be forced to raise rates? Could this have all been avoided, or at least mitigated if the Fed didn’t ease so aggressively over the past year? The fact that we can even ask such questions with a straight face suggests that the hour is already late.
To be fair, every central bank is forced into a tradeoff of growth vs. inflation in varying degrees, depending on the circumstances. There are no absolutes in monetary policy. At times, one comes only at the expense of the other. But history reminds that sometimes economies can be two-time losers on those fronts. Yes, that’s rare, which is probably why few central banks make preparations for those twin demons. Nonetheless, rare doesn’t mean never.