The puzzle of inflation remains for the Fed


by Howard Schneider

WASHINGTON (Reuters) – The puzzle of inflation remains to the u.s. federal Reserve and its new chairman Jerome Powell, who will replace next February, Janet Yellen.

At its last meeting of its monetary year, the Fed has raised its interest rate and its growth forecast for the world’s largest economy, while believing that inflation should still fail to reach its goal of 2%.

The national bank considers to be “transient” all the price cuts affect different sectors, from clothing to phone subscriptions, energy and drugs, but these declines were large enough and repetitive that inflation remains below the target of 2% for five consecutive years.

The latest economic projections show that Fed officials remain baffled by this small price increase, in a context of a steady recovery in growth and an unemployment rate at lowest since 17 years.

When the Fed decided last week to raise its interest rates for the fifth time since the end of 2015, the problem of inflation has prompted two dissents among the nine voting members of the monetary policy committee (the Federal Open Market Committee) and the gap may widen.

“The inflation (…) is too low and has been for some time,” said Friday the president of the antenna of the Chicago Fed, Charles Evans, in a statement released Friday.

Charles Evans, who will not have the right to vote in the next meetings monetary 2018, said to be pronounced against this, the third monetary tightening of the year, due to concerns about the weakness of inflation.


This debate is likely to continue during the first months of the term of Jerome Powell to the chairmanship of the Fed. It will be difficult for the Fed to justify further rate increases unless inflation moves closer to its goal.

With rates already exceptionally low, it means that Jerome Powell will have a margin of manoeuvre to support the economy by lowering in the event of a recession.

During his last press conference as Fed president, Janet Yellen had little advice to give, and merely recognize that there may be something fundamentally wrong in the way in which the Fed considered inflation, unemployment, and the relationship between the two.

“I tried to be direct in saying that this could lead us (to think) that it is something more deeply rooted and which could be permanent. It is very important to investigate this possibility and, if necessary, revise our thinking,” she said Wednesday to the press, citing the weakness in inflation.

The economic forecasts released after the meeting, Fed monetary contain elements that may seem contradictory.

The Fed has said anticipate an acceleration of growth in 2018, and an unemployment rate of 3.9% compared to 4.1% currently. A low level could allow employees to ask for wage increases, and businesses increase their prices.

And yet, inflation should still fail to achieve the target of 2% set by the Fed in 2018, which may explain why the central bank does not expect acceleration in the pace of rate hikes next year.


The Fed expects an inflation of 1.7% this year, 1.9% in 2018 and 2% in 2019, a level which it should remain.

The Fed officials have already issued projections similar in the past and are deceived.

Yellen explained that the Fed did may not be the link between inflation and the rate of unemployment in the current economy, with millions of people of working age without employment, others choosing part-time jobs and the development of an “economy of small jobs”

Theoretically, there is a rate of unemployment below which inflation increases, and it is possible that the estimate of this rate is declining and “needs to come down more,” she said.

In its projections last week, the Fed has maintained that rate over the long term,” 4.6%, with an average rate of 4% until 2020 without a significant recovery in inflation, another apparent contradiction.

The distribution experts and specialists in the inflation estimate that sectors of the clothing, automotive, electronics and other goods should not contribute to rising inflation.

The 1.3% decline in clothing prices in November in the United States has been the strongest decline in the sector since 1998.

The evolution of distribution channels and consumption habits are weighing on the price, ” says Blerina Urici, vice-president of the department for economic research at Barclays (LON:BARC).

Of online commerce sites, such as Amazon (NASDAQ:AMZN), represent only 10% of retail sales, is within it, and the impact of technological innovation on the sales and distribution will probably take a few years to make themselves fully felt.

The technology enables consumers to lead the distributors in a very competitive environment,” explains Rick Helfenbein, of the professional association the American Apparel&Footwear Association.

“The distributors have reacted.”

(Catherine Mallebay-Vacqueur for French service, edited by Juliette Rouillon)

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