U.S. Inflation Is Close To Target, And Inflationary Expectations Are Quite Stable

According to the Federal Reserve Act, the central bank is obliged to structure its monetary policy to achieve the goals of "maximum employment, stable prices and moderate long-term interest rates."  

Price stability is usually expressed as a low and stable rate of inflation maintained over an extended period. Because of continuous improvements in the quality of goods and services included in the consumer basket, price stability is thought to be consistent with a small positive rate of measured inflation.

In practical terms, the Fed has accepted a stable target annual rate of inflation of about 2%, depending on the specific price index. In recent months inflation has been gradually rising in the U.S., though the measured increase can almost fully be attributed to the unusually weak inflation rate a year earlier. (Keep in mind that price inflation is generally calculated as increases over the past twelve months.)

In April, the annual rate of increase (y/y) in the total CPI was 2.1%, marginally higher than in the previous month increase.  The Federal Reserve Bank of Dallas' own “Trimmed Mean PCE inflation measure” came in at a higher 1.8% y/y in March.

Even though actual inflation seems to be increasing slowly, the Dallas Fed’s review of consumer survey data and market-based indicators of inflation expectations suggest that the inflation outlook is quite stable.

According to the Dallas Fed, “the recent survey shows long-term CPI inflation of roughly 2.25 percent. CPI inflation typically runs about 30 basis points higher than PCE inflation, thus implying an expected long-term PCE inflation of roughly 1.95 percent.”

The following charts focus on these inflation measures. The first chart highlights the recent modest upsurge in inflation, while the second chart indicates that inflationary expectations should be rather stable over the next 120 months.  

 

Source: Federal Reserve Bank Of Dallas, U.S. Economic Update, May 8, 2008