Coverage: Inflation fell below Fed’s 2% goal in 2018

Inflation fell short of the Federal Reserve Board’s 2 percent target in 2018 for a seventh consecutive year, though a closely watched measure of underlying price pressures gained traction in December.

Paul Kiernan of The Wall Street Journal had the news:

The Fed’s preferred inflation gauge, the personal-consumption-expenditures price index, rose 1.75% in December from a year earlier the Commerce Department said Friday. The index was held down mostly by a decline in energy prices at the end of the year, posting a gain of just 0.06% in December from November.

Tame inflation in recent months has underpinned a shift in the Fed’s strategy. After raising borrowing costs four times in 2018, policy makers in recent weeks have signaled plans to exercise caution this year given global risks to economic growth and their belief that rates are no longer unnecessarily low.

“Given muted inflation and stable inflation expectations, I believe we can be patient and allow the data to flow in as we determine what future adjustments…may be appropriate,” Fed Vice Chairman Richard Clarida said Thursday.

Lucia Mutikani of Reuters reported that consumer spending also dropped:

It reported that consumer spending, which accounts for more than two-thirds of U.S. economic activity, dropped 0.5 percent in December. That was the biggest decline since September 2009 and followed a 0.6 percent increase in November.

Households cut back on purchases of motor vehicles and recreational goods in December, leading to a 1.9 percent plunge in spending on goods. Spending on goods increased 1.0 percent in November. Outlays on services edged up 0.1 percent, held back by a decline in spending on household electricity and gas. Spending on services advanced 0.4 percent in November.

When adjusted for inflation, consumer spending fell 0.6 percent in December, also the largest drop since September 2009, after rising 0.5 percent in November.

Gavyn Davies of The Financial Times reported that the Fed is rethinking its policy on inflation:

Instead, the Federal Open Market Committee seems concerned that inflation is failing to respond to recovering economic activity, implying that it might be difficult to cope with even lower inflation when the economy next enters a recession.

The fact that US inflation has not responded to sharply falling unemployment levels, sometimes known as the disappearance of the Phillips Curve, is often described as a puzzle. However, that word is misleading, since a great deal of recent research has established the main reasons for the loosening of this relationship.

Structural factors such as the effects of the internet and Chinese imports on goods prices have been important. But a key conclusion is that the growing credibility of the Fed’s 2 per cent inflation target has anchored inflation expectations, so that any temporary fluctuations in inflation and economic activity are ignored. In the decades before 1990, inflation shocks were often “accommodated” by monetary policy, altering expectations, and causing substantial spikes in inflation.