Cheer, Don’t Fear, the US Inflation Gap

The Week Ahead

May 13, 2019

Only on Wall Street, or in the halls of the Federal Reserve, would you ever hear complaints about inflation being “too low.” Down on Main Street, inflation is seen as only about prices, not wages, so nobody gripes if it stays tame. In this case, Main Street might be right about whether we should be worried about a US core PCE price index sitting at 1.6%, four decimal places off the Fed’s preferred target.

For one, how much should we read into a few decimal places on a somewhat arbitrarily selected measure of inflation. Total CPI, more widely used in labor contracts for cost-of-living adjustments, is right at 2%. The Dallas Fed’s trimmed mean PCE inflation rate, arguably a better way to measure the “core” trend than simply dropping food and energy, is at 2.0%. The San Francisco Fed’s analysis shows that the parts of core PCE inflation that are cyclically driven are running at 2.5%. And for good measure, the NY Fed’s “prices only” underlying inflation gauge rounds to 2.0%.

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