Federal Reserve officials face a conundrum at their next policy meeting: Inflation remains far below target as the central bank considers scaling back its bond-buying program. Overall prices rose just 0.1% in July from June, according to the Fed’s preferred inflation gauge, the Commerce Department’s price index for personal consumption expenditures, released Friday. Core prices, which exclude volatile food and energy costs, also nudged up 0.1%. Both rose at a slower pace than in June. Compared with a year earlier, overall prices were up 1.4% while core prices rose 1.2%. The report is the last reading of this inflation measure before the Fed’s Sept. 17-18 meeting, where officials are expected to consider reducing the central bank’s $85 billion-a-month bond-buying program. The bond-buying is aimed at boosting economic growth by lowering long-term interest rates, which the Fed hopes will spur spending, hiring and investment. The Fed’s bond-buying and its promises to keep short-term interest rates low for a long time reflect discomfort that it is failing on both prongs of its mandate—to aim for maximum employment and stable prices, which it defines as inflation of about 2%. A decision to begin scaling back the extraordinary monetary stimulus will be based on Fed officials’ near-term forecasts for growth, jobs and inflation as well as their assessment of the risks the economy confronts. Rising prices often signal that the economy is strengthening, indicating that companies have increasing leverage to charge more. The Fed acknowledged concerns about low inflation in its latest policy statement. But it said inflation and economic growth should pick up in the second half of the year as the effects of higher taxes and federal spending cuts fade. Some economists said Friday’s inflation data will do little to change that view, with inflation appearing to stabilize now. “Even though the level of inflation looks low and feels low and is low, confidence that it’s going to go lower continues to diminish,” economist Eric Green of TD Securities said. While the latest inflation reading might not cause the Fed to delay a reduction in its bond purchases, it might steer officials toward a more cautious strategy of making smaller reductions. Federal Reserve Bank of St. Louis President James Bullard, who has raised concerns about inflation being too low, floated that strategy in August. Joshua Shapiro, economist at MFR Inc., said the fact that prices are still increasing, however sluggishly, will allow the Fed to focus more on the state of the labor market and broader economy in its deliberations. “I think they’ve made it pretty evident that [inflation] is not the dominant force right now,” Mr. Shapiro said. “They’re more focused on trying to get themselves out of a clearly unsustainable policy stance and you’ve got to do it at some stage. If you want to wait until conditions are perfect, you’ll never start it.”"
Posted on: Sat, 31 Aug 2013 07:29:42 +0000
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