Inflation is likely to move back to the U.S. central bank’s 2% annual target in the “near-term,” said Richmond Fed President Jeffrey Lacker, on Thursday. “After the price of oil bottoms out, I would expect to see headline inflation move significantly higher,” Lacker said in a speech to the Chamber of Commerce in Raleigh, N.C.
Lacker is a hawk on the Fed’s interest rate committee, having dissented at the Fed’s September and October meetings in favor of an increase in interest rates. He is not a voting member of the Fed policy committee this year.
His visual capacity is nil! What would he think after looking at a chart like this?
Between 2001 and 2008, oil prices went up by a factor of 6. Headline inflation went up but core inflation was very well behaved, staying close to “target”.
Between December 2008 and January 2011, oil went up by a factor of 4, and remained at that high level for the next 37 months. Headline inflation quickly moved below target before tanking with the drop in oil after early 2014. Meanwhile, core inflation was significantly below target for most of the last seven years.
He thinks oil price is the driver of inflation, when it only determines the swings in headline inflation. That misguided thinking has already brought much grief!
Think instead that monetary policy determines trend inflation, and look at core inflation as “trend inflation”. In that case, if you are “hawked” on headline inflation you will be “busy”, but will also do a lot of harm!