Consumer Price Index Data: Inflation Woes and Confusion Continue

By at 12 March, 2024, 1:41 pm

by Raymond J. Keating –

The inflation news coming from the latest Consumer Price Index report is troubling.

According to the U.S. Bureau of Labor Statistics, inflation, as measured by the CPI, came in at 0.4 percent in February.

That was up from 0.3 percent in January, and the 0.2 percent inflation rate in each of the two previous months. As noted in the following chart from the BLS report, after coming in quite tame from October to December of last year, inflation has stepped up in 2024.

For good measure, inflation has now run hot in four of the past seven months.

Looking back, the annualized rate of inflation registered approximately 3.2 percent over the past year, 3.2 percent over the past six months, and 3.6 percent over the past three months. Compare these numbers with the Fed’s target of inflation running at about two percent.

The Fed is running contradictory monetary policy.

On the one hand, after inflation started to spike in early 2021, the Fed hiked the federal funds interest rate from March 2022 to the end of July 2023. Also, from December 2021 to February 2023, the Fed started taking small steps in reducing the monetary base (i.e., currency in circulation plus bank reserves), which the Fed had expanded to unprecedented levels starting in late summer 2008 through late 2021.

I’ve long argued that the Fed should leave interest rates to the market, and just focus on the money supply. But at least, one could detect some degree of coherent thinking on the Fed’s part here.

However, since February 2023, the Fed actually has resumed growth in the monetary base. (See the following chart.) So, the Fed remains concerned about inflation – and inflation remains high – but at the same time, the Fed is expanding the part of the money supply over which it has greatest control.

Source: Federal Reserve Bank of St. Louis, FRED

This reveals, once again, the long-running confusion that reigns over monetary policy.

Quite simply, if inflation ultimately is about too much money chasing too few goods, then hiking interest rates while expanding the money supply makes absolutely no sense, and actually works against getting inflation under control. And when monetary policy is detached from the realities of inflation, consumers, investors and businesses lose confidence that the dollar and prices will remain or return to stability.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.


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