May 02, 2017
Both the overall and core deflators for personal consumption expenditures (PCE) fell in March. This brought the change in the core PCE deflator over the last year down to 1.6 percent. The Fed officially targets a 2.0 percent as an average rate. This means that it wants inflation to occasionally be above 2.0 percent in order to average out the times when it is below 2.0 percent. That should mean that it would want to see the inflation rate accelerate slightly to meet this target.
The Fed is widely expected to raise interest rates at least twice more in 2017 and quite likely three times. With inflation well below its target rate, it is reasonable to ask why?
Just to remind folks, this is not an argument about a baseball box score. The point of raising interest rates is to slow the economy and keep people from getting jobs. Also, by keeping labor markets weaker, higher interest rates prevent workers from getting higher pay increases. So, this does matter.
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