INFLATION has lingered beneath the Federal Reserve’s 2% target for nearly as long as the goal, set in January 2012, has existed. Lately, the misses have been whopping. Data released on September 28th showed that prices have risen by only 0.3% over the past year, according to the Fed’s preferred measure. Conventional wisdom says this shortfall has been caused by one-off factors; chiefly, tumbling oil and commodities prices. For months, the Fed has said that prices will pep up once these effects dissipate. Could it be wrong?
Conventional wisdom is right, up to a point. Core inflation, which excludes fuel and food prices, is a healthier 1.3%. Yet this is still too low. In a speech on September 24th Janet Yellen, the Fed’s chairman, said a strong dollar—another one-off factor—was partly to blame. The greenback is 15% cheaper than a year ago on a trade-weighted basis. This has made imports cheaper and kept costs down for firms that rely on imported parts. If Ms Yellen is right, and if the dollar does not rise further, core inflation should rebound in 2016, with the headline rate not far behind.
Yet not everyone is convinced....Continue reading
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