Oh that “Elusive” Inflation!

Elusive means “6-10 months”.

Inflation is not likely to reach the Federal Reserve’s 2% annual target this year even if monthly data begins to pick up as expected, said William Dudley, president of the New York Fed, on Thursday.
“I do think inflation to start to move higher in the medium term, but probably not get all the way back to sort of 2% on a year-on-year basis,” Dudley said in remarks to reporters at his bank’s headquarters near Wall Street.
Low inflation readings since February will continue to weigh on the index until next year, he said.
“We’re not going to get to a year-over-year number of 2% until some of these very low readings drop out of the statistics six to ten months from now,” he said.
Dudley predicted the tight labor market combined with the weaker dollar should begin to foster upward inflation pressure soon.

Dudley Right on Cue

Dudley was right on cue today given that Producer Prices Unexpectedly Declined.

Transitory Factors to Continue

The Fed, at least Dudley, now believes transitory factors will continue for the rest of 2017 or so.

“Idiosyncratic and Transitory Factors”

On August 2, I noted “Idiosyncratic and Transitory Factors” Holding Down Inflation.

At that time, Loretta Mester, president of the Cleveland Fed commented: “My suspicion is it’s the idiosyncratic factors, it’s transitory and that the factors pushing down inflation are going to dissipate over time.”

Transitory for 9 Years!

Inquiring minds may be wondering how long these transitory factors have been going on.

Here is a chart of the Fed’s preferred inflation index, PCE excluding food and energy, since 1992.

The Fed hit its inflation target precisely one time in the last 9 years.

One Time Factors

The new definition of transitory is on the order of 9 years. And in regards to “one-time” factors, it seems Mester and Dudley need to study the above chart carefully.

Inflation Puzzle

Note that the Fed cannot hit its inflation target despite a falling US dollar.