July 2019 CPI Inflation

Core inflation has recovered a bit in the last two months, but we remain in the context of relatively low non-shelter inflation and high shelter inflation, averaging out to roughly on-target total core inflation.

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I will probably continue to do these updates for a while, but I suspect the context is set, and specific shifts in inflation won't affect things much in the near term.Inflation isn't likely to shift sharply in either direction, and in the time frame that is important for the Fed right now, noise dominates information.So, effectively, Fed discretion will rule, although it will frequently be cast in language of inflation or interest rate control.

The context in place seems to be that the Fed will loosen.Not so much to avoid a bit of a contraction, but not so little as to be greatly disruptive.Excess shelter inflation is part of that context, but other factors will come into play, too.

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Here, I think the 2008 event is informative.The Fed is somewhat forgiven for allowing NGDP and inflation expectations to drop so sharply because at that time inflation was slightly above target.This makes inflation seem like an important short term element in Fed decision making.But, I disagree with that analysis.Inflation wasn't anywhere near a level that would have led any sane regulator to sit aside as one panic after another struck the economy.And, even as the Fed did that, the overwhelming criticism of them was that they were even daring to try to stabilize financial markets.Even today, many commentators explicitly complain that selected economic agents weren't made to suffer enough.The financial crisis in late 2008 happened because it was popular.Slightly above target inflation is simply one of several justifications that were used to allow it to happen.For any reasonable observer with a straightforward goal of maintaining economic stability, none of those justifications were plausible excuses for allowing such economic dislocations to occur.

The reality in late 2008 was that any reasonable monetary or fiscal policy would have caused a rebound in housing prices, as a side effect.That would have been taken as indefensible.

We don't have the same dramatic setup today, so the stakes aren't as high.But, similarly, inflation and interest rates will be used to communicate short term monetary shifts even though those shifts will have little to do with either.