Today’s inflation report is a gift, and it arrives just in time for the holidays. But after we’ve unwrapped it, ogled its components and dispensed a few “oohs” and “aahs,” it’ll be time to ask: Is it a gift that keeps on giving?
There’s reason to think that the gift may in fact be around a while, as suggested by reading today’s update on November’s consumer prices, which were unchanged last month. Ditto for core inflation, which excludes food and energy. In fact, one could say with more than a little pleasure that a whole lot of ‘nuttin was going on with inflation last month.

If true, the trend (or non trend, if you will) frees up the Federal Reserve to focus on growth. Once it’s clear that inflation is no longer accelerating, the central bank can, if necessary, begin cutting interest rates to offset any additional weakness in the economy, which some dismal scientists predict for 2007.
Taking inflation out of the picture, in sum, simplifies the Fed’s job enormously. Promoting growth and fighting inflation is a thankless task, by contrast. In fact, it may well be impossible to pull off both with any success, at least simultaneously. Then again, it depends on the magnitude of the challenge. Mild and fading inflation combined with modest job growth and low unemployment is one thing. Rising inflation and rising unemployment are something altogether different. For the moment, it appears that we have the former.
That’s no small advantage for Bernanke and friends. Generally speaking, fighting inflation isn’t often a growth-promoting, jobs-producing endeavor. Turning that notion around, it’s also true that pumping the economy with greater doses of liquidity for encouraging growth and convincing businesses to hire more workers may not impress inflation hawks.
Sure, a deft central bank can split the difference and manage some success in both arenas. But it helps if there’s a beneficial tailwind. In the 1990s, inflation generally was coming down for a variety of reasons, leaving Greenspan’s Fed with a relatively wide margin of error. By contrast, Volcker’s Fed in the early 1980s wisely sought to fight the lofty inflation of the era, which left little opportunity for stirring the growth pot until after the pricing beast was returned to his cage.
Today’s Fed faces milder inflation threats and milder growth opportunities. Indeed, a reading of the numbers du jour suggests there’s not much to fear. Unemployment is still quite low, the economy is still bubbling, and inflation appears to be receding or at least treading water. But it’s the future, as always, that raise questions. We don’t know what’s coming, but we can extrapolate from the past, a risky game but one that offers a slice of context nonetheless.
While some may have already decided that inflation’s a dead issue, we’ll continue to sleep with one eye open. It’s not yet clear that core inflation has died as a material threat. Consider the chart below, which shows core inflation on a rolling 12-month basis. The recent slide is encouraging, but it’s not yet obvious that it represents something more than a temporary blip. Maybe, perhaps, possibly. But we refer you to the spring of 2005, when a similar decline arrived, only to prove fleeting. Higher levels of core inflation soon followed.

But let’s not spoil the moment. Optimists want to celebrate, and so they shall. Inflation is dead is the toast. We’ll drink to that, while confessing to ourselves that we’re still not quire sure.