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Home>UPDATE: The Federal Reserve is peddling 'Tinker Bell economics'

UPDATE: The Federal Reserve is peddling 'Tinker Bell economics'

UPDATE: The Federal Reserve is peddling 'Tinker Bell economics'

09/20/2017

By Caroline Baum, MarketWatch

The Fed is waiting for wages to push up prices, but that's not about to happen

Was last week's 0.4% increase in the consumer price index (CPI) for August enough to convince a wary Federal Reserve that inflation is finally on track to hit 2%?

I doubt it. The big contributors to the increase in the CPI last month were gasoline (+6.3%), a knee-jerk reaction to expected damage to Gulf Coast refineries from Hurricane Harvey; and shelter (+0.5%), which accounts for one-third of the index and increased at its fastest pace in 12 years.

Some economists were reassured by the 0.2% increase in the core CPI after five consecutive monthly increases of 0.1% or less. The August increase raised the 3-month annualized change to 1.9% compared with 0% in May.

For a Fed that has spent the better part of five years wishing, hoping, for inflation to rise -- and stands ready with a list of excuses to explain the chronic undershoot -- policy makers will need more than one month to convince themselves that the end, 2% inflation, is in sight. (The Fed's preferred inflation measure is the personal consumption expenditures price index, not the CPI.)

Policy makers have been grasping at straws, some of which are quite thin, to explain the disconnect between the tight labor market and low inflation. Maybe they should start with their flawed model.

Almost every discussion on this subject begins with a statement of fact that the tight labor market, as evidenced by the 4.4% unemployment rate, should be lifting wages and prices.

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