Diane Swonk, Chief Economist
Feb. 19, 2010 – 7:50 a.m. CT
CPI Moderates, Dispels Fears of Inflation and Monetary Tightening
The Consumer Price Index (CPI) rose a smaller-than-expected 0.2% in January, with all of the increase attributable to an increase in energy prices. The core (non-food and non-energy) CPI actually declined in response to a drop in everything from shelter and vehicle prices to moderating airfares. (NOTE: vehicle prices pushed up the Producer Price Index yesterday, which I said at the time was NOT a harbinger of a broad-based inflation. Today's data confirms that.)
The Bottom Line: Those who are fearing a near-term surge in inflation should reevaluate their position. Inflation remains a medium-term rather than a near-term threat. We also should take the Fed at its word that it is trying to remove steps that were used to shore up the economy during an emergency but are NOT in any hurry to tighten. The Fed's move to increase the discount rate yesterday, in particular, was an attempt to return the discount rate to a more normal level (remove the subsidy to banks provided during the crisis), and NOT a signal of near-term tightening in monetary policy. Indeed, our forecast for the Fed to raise its target-which is now the interest that it charges on reserves-in December still holds. Stop listening to charlatans and limit your gold purchases to nice jewelry.
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