This morning’s inflation report–CPI down 0.1%, core CPI up just 0.2%–supports the case that maybe the Fed’s big rate cut yesterday was less a Wall Street bailout than plain old-fashioned monetary policy. One month of data isn’t what you could call conclusive evidence and it’s hard to look at the rising price of oil and the declining value of the dollar and not see some inflationary threat in the future, but still: the economy is clearly slowing, the job market is stalled, inflation is for the moment out of the picture. Of course the Fed shoulda cut rates to 4.75%!
No, I’m not sure I entirely buy that either. But if we keep getting economic numbers like this I might come around.
Update: Dr. Inflation himself, Brandeis University’s Stephen Cecchetti, has this to say about the CPI report:
Looking at the trend, every indicator of inflation is down substantially for where it was a year ago. The six month change in headline inflation has fallen from 4.8 to 3.8 percent (a.r.); the Median CPI is down from 3.5 to 2.5 percent (a.r.); the 16 percent trimmed mean has fallen from 3.2 to 2.2 percent (a.r.); and the conventional core measure excluding food and energy has gone from 3.3 to 2.0 percent (a.r.). My conclusion is that over the last year the inflation trend has fallen by roughly one full percentage point.
He goes on to give his blessing to the Fed’s rate cut:
Regular readers of this report know that I am an inflation hawk; and I fully agree with the view that you cannot bail out people who did stupid things. Nevertheless, there are many reasons this was the right thing to do. On the inflation front, this is not the time to worry about inflation two years from now. Instead, policymakers are rightly focused on containing the damage of the fairly severe problems in short-term lending markets. On bailing out, you don’t destroy the economy in order to punish people who took irresponsible risks. Instead, you make sure the mess isn’t too big, and then you work on regulation and supervision to ensure it doesn’t happen again.
Update 2: A mostly contrary view that I just found in my inbox from Unicredit’s Harm Bandholz (he was writing about yesterday’s PPI report, but same difference):
[T]his should be the end–-not the beginning–of a period with better inflation figures: Energy prices just reached new all-time highs and unfavorable basis effects are likely to lift the y-o-y rates of all inflation measures strongly. The PPI y-o-y rate might easily reach 51/4% in October, while the CPI y-o-y rate should exceed 31/2%.