Last week, the Federal Reserve reiterated its plans to continue buying bonds at the aggressive pace of $85 billion per month. This was widely expected. However, the Fed also hinted that it could decide to do even more shopping if employment growth and inflation do not meet its targets.
We suspect that Bernanke & Co. felt the need to include this new information largely due to the recent weak patch in the economy, which seems to be an annually recurring phenomenon. Of particular importance to the Fed was March's employment report, which came in well below expectations (but has since been revised upward). In addition to, or perhaps as a consequence of, the slow patch in the economy, inflation seems to have subsided in recent months.
The slowing growth in price levels has further emboldened the Fed to stay the current course. The Wall Street Journal's Jon Hilsenrath reported: "U.S. inflation has moved noticeably below the Fed's 2% goal, part of a global slowdown. This has taken pressure off the Fed and other central banks to pull back from their efforts to boost growth by pumping new money into the world economy."
Below are three metrics widely used to track the level of prices in the domestic economy, the PCE, the CPI and the ECI. The versions of the Personal Consumption Expenditure deflator (PCE) and Consumer Price Index (CPI) used here exclude the prices of food and energy. The Fed tends to evaluate these indexes the same way because the price of food and energy can be volatile. The final price index is the Employment Cost Index (ECI).
The cost of labor is important because wage inflation often leads to more widespread inflationary pressures in the economy. In any event, the indisputable conclusion from this chart is that the economy is experiencing disinflation—a slowing of the rate of inflation—rather than troublesome increases in inflation.