Inflation … What Inflation?

Just a brief note on today’s inflation report: those of you expecting more action from the Fed to stimulate the economy will have that expectation reinforced. Inflation in September, as measured by the Consumer Price Index, was a meager 0.1%. Over the past twelve months it has been 1.1%. And that’s including a 5.1% increase in gasoline prices. If we take out the volatile food and energy component of the index we see that “core” inflation was just 0.8%, the lowest annual rate since 1961. That’s way below the bottom of the Fed range and perilously close to deflation. There’s not much more to say other than numbers stuck in this range are likely to provoke the Fed into action sooner of later. I have argued many times that we could do with a healthy bout of inflation to ease our debt burdens. In an economy bent on ridding itself of debt inflation is a boon. So those who fear the inflationary consequences of more monetary easing in the form of QE2, are likely to get those fears confirmed. Oddly that will be a good thing. As long as we rein it in later on.

But that’s a long way off. Right now inflation is not our problem, potential deflation is.