This Inflation Report Will Lead to Bad Fed Decisions
The latest gains in the consumer price index are likely to reinforce the central bank’s incorrect notion that the labor market is too tight.
Everything is expensive right now.
Photographer: Brandon Bell/Getty Images
The US government on Tuesday released its monthly report on consumer prices, which rose in January at the fastest rate in three months. The sense is that such evidence of persistent inflation pressures may prod the Federal Reserve to raise interest rates even higher and keep them there longer than markets expect.
The way Fed policymakers are thinking about inflation is that it all emanates from the labor market, which they describe as too hot for their liking. More specifically, economists at the central bank believe the so-called natural rate of unemployment – the rate at which the economy is neither headed for recession nor overheating - has moved up from 4% to somewhere between 5% and 6%. For the Fed, this is a big problem because the unemployment rate dropped to 3.4% in January, the lowest in 53 years.