A key question right now is how low the unemployment rate can fall before inflation picks up. Right now core inflation is falling, but some of that is probably due to bleed through from falling energy prices. So we have to be careful reading too much into the low core inflation numbers.
Last year, many of the "hawks" at the Fed were arguing inflation would pick up when the unemployment rate fell to 6%. They were clearly wrong since the unemployment rate was at 5.6% in December!
Professor Krugman wrote this morning: Tough Fedding
Although monetary policy works with a lag, as Krugman notes, no one knows when inflation will pick up - and the risks of raising too soon far outweigh the risks of waiting too long.
I'd like to add on inflation that there might be a demographics component, as I noted early this year:
I expect the FOMC will wait until core inflation is clearly moving back towards their 2% target - and hopefully wait until wage growth is increasing.
from Calculated Risk http://ift.tt/1HTXRyq
via YQ Matrix
Last year, many of the "hawks" at the Fed were arguing inflation would pick up when the unemployment rate fell to 6%. They were clearly wrong since the unemployment rate was at 5.6% in December!
Professor Krugman wrote this morning: Tough Fedding
[M]y point is that recent data are perfectly consistent with the view that full employment requires an unemployment rate below 5 percent; the most recent data would suggest an even lower rate. This might or might not be right; I don’t know. But the Fed doesn’t know either.
And in the face of that uncertainty, the crucial question is what happens if you’re wrong. And the risks still seem hugely asymmetric.
Although monetary policy works with a lag, as Krugman notes, no one knows when inflation will pick up - and the risks of raising too soon far outweigh the risks of waiting too long.
I'd like to add on inflation that there might be a demographics component, as I noted early this year:
On inflation, I've been looking at this from a demographics perspective. If we look at the annual change in the prime working age population, there is one other period similar to the current situation - the early-to-mid 60s.
...
In the 1960s, inflation didn't pickup until the unemployment rate had fallen close to 4%. There could be several demographics reasons for the low inflation (in addition to policy reasons). As an example, maybe older workers were being replaced by younger workers who made less (just like today), and maybe the slow increase in the prime working age population put less pressure on resources.
Ignoring for the moment monetary and fiscal policy differences between the periods ... maybe the unemployment rate will have to fall below 5% before inflation picks up.
I expect the FOMC will wait until core inflation is clearly moving back towards their 2% target - and hopefully wait until wage growth is increasing.
from Calculated Risk http://ift.tt/1HTXRyq
via YQ Matrix
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