Inflation, or the lack of, has been a huge focus of the Fed recently. The drop in the closely-followed year-over-year core rate from 0.9% in August to 0.8% in September is very likely getting the attention of policy makers and helping to solidify a decision to implement a new round of easing (see QE appears to be on the way).
Ben Bernanke said this morning in a speech entitled Monetary policy objectives in a low-inflation environment (if that title isn’t a hint at new measures, I’m not sure what is) that the Fed would like to see inflation at “about 2% or a bit below.”
Bernanke’s comment that “given the Committee's objectives, there would appear--all else being equal--to be a case for further action” suggests new measures are in the works. However, he gave no assurances that new bond buys will be announced at the November 3 meeting.
Still, a core rate of inflation at 0.8% signals that something will be announced next month.
Disinflation is abating
It is important to point out that the slowdown in the rate of inflation – disinflation – has mostly abated at the retail level. And price increases at the wholesale level have moved modestly higher over the last year.
As I’ve mentioned in the past, I don’t believe there is much of a risk of deflation, and central bankers have echoed similar sentiments. But inflation that is too low is a big factor that is driving monetary policy.
If new measures are announced, and that seems likely, the risk of an overshoot is real, which could unleash a jump in prices that nobody wants.
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