US consumer prices rose just 0.2 per cent this month, with prices excluding food and energy falling 0.1 per cent (their first fall in over a quarter century). The numbers show that, in January at least, inflationary pressures weren’t an issue. But, as it does monthly, the CPI has reignited the debate: longer-term will the problem be inflation or deflation?
“Hawks and doves will split between half full and half empty in January, as hawks will focus on the continued headline gains led by the key bellwethers of food and energy, while doves will strip out volatile commodity prices and focus on the 0.1 per cent drop in both apparel prices and the theoretical construction of owners equivalent rent,” wrote Mike Englund of Action Economics.
And, indeed, while the FOMC agreed that core measures of inflation were likely to remain subdued, there was no consensus about whether inflationary risks are weighted to the upside or downside.
One participant noted that core inflation had been held down in recent quarters by unusually slow increases in the price index for shelter, and that the recent behavior of core inflation might be a misleading signal of the underlying inflation trend. . . Energy prices had dropped back in recent weeks, but many participants saw upward pressures on commodity prices associated with expanding global economic activity as an inflation risk. However, some noted that the high degree of slack in resource utilization posed a downside risk to inflation. Survey measures of expected future inflation were fairly stable, but some market-based measures of inflation expectations and inflation risk suggested continuing concern among market participants about the risk of higher medium-term inflation, perhaps reflecting large fiscal deficits and the size of the Federal Reserve’s balance sheet.
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