Supposed inflation monster isn’t rearing its head

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  • Bernanke has laid the groundwork for third major expansion of the Fed’s balance sheet #JacksonHole

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  • The Fed justifies its accommodation by pointing out that inflation is falling

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  • Each major intervention by the Fed since 2008 has come as inflation is falling towards zero

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  • The recent past has put inflation and inflation expectations on a downward trajectory

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  • The supposed inflation monster isn’t rearing its head

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At Jackson Hole, Fed Chairman Ben Bernanke continued to lay the groundwork for a third major expansion of the Fed’s balance sheet in the form of quantitative easing (QE-3).  While the Chairman didn't actually announce the program this weekend, he reiterated the Fed’s position that more purchases will be warranted fairly soon if the economy doesn’t pick up.

The Fed justifies its accommodation by pointing out that inflation is falling, contrary to GOP remonstrations that inflation is set to explode.  Indeed, each major intervention by the Fed since 2008 has come as inflation is falling towards zero, and the recent past has put inflation and inflation expectations on a downward trajectory.  The supposed inflation monster isn’t rearing its head.

The Fed uses "core inflation" - inflation minus food and energy prices - because it more closely anticipates what future inflation will be.  The Fed is less concerned with what prices are right now than they are with what prices will be tomorrow.  Core inflation helps them anticipate better than headline inflation does.  It's also a better measure of what the Fed can actually control.  The Fed can't do much about, say, the massive corn drought that's impacting food prices, but they can do things about the rates you pay for loans.   Sometimes the "core inflation" number is higher than headline inflation; sometimes it is lower.  This month, the two are close together.

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