Rising Inflation No Longer Looks Likely

(Bloomberg View) -- Turns out that U.S. inflation isn't surging and that former Federal Reserve chair Janet Yellen's "mystery" isn't solved.

The tumult that wracked financial markets last month -- after the January employment report showed a pick-up in wages -- has abated. Inflation worryworts that were everywhere a few weeks ago seem to have gone underground. Good. As I wrote then, not enough had changed for the Fed to undertake more belt-tightening than already envisaged.

Wherever they are hiding, the worryworts might be somewhat calmed by pedestrian pay increases in February, reported last week, and government figures Tuesday that showed consumer prices firming without any sort of breakout. But, hey, that was last month. Never mind.

So where are we? Kind of where we were. The Fed's preferred measure of inflation is creeping closely back to 2 percent, the central bank's target. It sure isn't racing in that direction and is seriously low for this stage in the economic cycle: The expansion that began in 2009 is almost nine years old. The huge corporate tax cut signed into law by President Donald Trump in December isn't projected to fundamentally alter the course of growth.

Deutsche Bank AG economists have offered a new sub-plot to the whodunnit. In a report last week, the bank's U.S. economists poured some cold water on the "Amazonization" idea. Online retailing, often fingered as a perpetrator of low inflation, might shoulder only a small portion of the blame.

They aren't saying the expansion of the Seattle-based retailer of just about everything isn't a significant economic or industry event. They are saying that it's insufficient as an explanation for disinflation. More likely, the "Amazon effect" limits the upside to inflation rather than keeping it down. E-commerce probably shaves about 0.1 percentage point off core inflation each year.

And just so we are clear: The Fed targets a measure called the Personal Consumption Expenditures Index, which was last at 2 percent in February 2017. PCE has missed the 2 percent target for most of the time the Fed has had the number in its sights. The index fell to 1.4 percent in the middle of last year and got stuck at that level for several months before edging up. It was 1.7 percent in January.

Not especially impressive given a jobless rate that's way down at 4.1 percent. The Fed can let the economy run hot a little longer.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg View. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

To contact the author of this story: Daniel Moss at dmoss@bloomberg.net.

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