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Economic Watch: Inflation Below Fed's Goal for Raising Interest Rates

August 19, 2015

By Evan Lockridge

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Inflationary pressures on the U.S. economy remain low as evidenced by a report released Wednesday by the Commerce Department showing an increase of just 0.1% in July from the month before.

The small uptick in the Consumer Price Index (CPI) follows a 0.3% rise in June and is the sixth consecutive monthly hike, but it's up only 0.2% over the past year.

Core prices, which remove those for the volatile food and energy sectors, increased 0.1% in July after moving 0.2% higher in June. Over the past year core prices are up 1.8%.

During July food prices rose 0.2% as costs increased in all six major grocery store food groups. The energy index rose 0.1% as a hike in gasoline prices more than offset declines in other energy component indexes.

A weaker-than-expected rise in consumer prices at the start of the third quarter further fuels the argument for the Federal Reserve to remain on the sideline, delaying liftoff of interest rate hikes beyond the September Federal Open Market Committee meeting, according to Stifel Fixed Income Chief Economist Lindsey Piegza.

“Since the end of 2012, every Fed communication has continued to acknowledge the sub-standard level of inflation which continues to persist,” she said. “Thus, at this point, raising rates with inflation so far below the Fed’s target could create a misperception in the marketplace that the Fed has lowered their inflation goal.”

In Wednesday’s Wall Street Journal, Minneapolis Federal Reserve President Narayana Kocherlakota outlined the case for the Fed to wait longer than expected for a rate increase.

“Raising rates now,” he said, “…would create profound economic risks for the U.S. economy.” Given the tepid pace of the U.S. recovery and sluggishly low inflation, “higher interest rates would push the economy away from the FOMC’s economic goals, not toward them.”

Kocherlakota explained the Fed has a dual mandate – full employment and stable prices – and yet inflationary pressures remain sluggishly low, well below the Fed’s longer-term target of 2%. The U.S. inflation outlook, he concluded, “provides no justification for policy tightening at this juncture.”

A clearer picture of what the Fed is expected to do regarding a possible interest rate hike may be clearer by Wednesday afternoon when it releases minutes of its July meeting.

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