Inflation Clarity Eludes the Fed and Markets

Federal Reserve Chairman Jerome Powell stated in testimony before Congress last week that policy makers will continue to strike a balance between avoiding an overheated economy and bringing the inflation rate back to 2 percent on a sustained basis. That’s an interesting statement, as it seems to imply that an overheated economy will be measured in the standard inflation measures.

Yet even if the economy “overheats,” it’s doubtful that the attendant demand-pull, cost-push factors that propel inflation will show up in the current measures of consumer prices. Indeed, the core inflation scorecard does not offer the same “inflation clarity” as it did in the past because it excludes valuable price signals from the asset markets and other areas of the economy. In other words, core consumer prices, or the ones that are targeted by policy makers, no longer show any consistent ties to the economic cycle, and the prices that matter more today are those that are not targeted, such as asset prices.