Today’s was a good inflation report. It is still not the time to declare victory.
Today’s consumer price index report (CPI) from the Bureau of Labor Statistics showed headline inflation of 3.3 percent year-over-year. The index was flat in the month of May. Core inflation, excluding food and energy, was 3.4 percent year-over-year.
The press is jubilant, as this reading was below expectations. The Federal Reserve will also announce an interest-rate decision later today. It needs to hold interest rates where they are.
A 3.3 percent inflation rate is better than a 9 percent inflation rate, but the Fed’s target is 2 percent. It measures that using the PCE price index, which is slightly lower than the CPI and gets released later in the month. But the Fed should not let a financial press or politicians begging for rate cuts sway its decision-making.
Cutting now would amount to signaling at least partial satisfaction with inflation over 3 percent. The difference between 2 percent and 3 percent might not seem like a big deal, but it is. First, inflation is cumulative, and that extra percentage point each year adds up over time for a much bigger increase in the price level.
Second, and probably more importantly, Jerome Powell has staked the Fed’s credibility on a return to 2 percent inflation. Some have argued he should raise the inflation target to 3 percent, but he has declined to do so. To go back on that now would signal that he doesn’t have what it takes to stand up for independent monetary policy that seeks price stability.
We saw the European Central Bank make its first rate cut last week, even as it increased its inflation projections. That signals that the bank is content with a little extra inflation for a while. Central banks must not be.
The financial sector wants to go back to the near-zero interest rates of the 2010s because it was fun when money was basically free and the stock market did fantastic. The Fed’s duty is to price stability and full employment, not to the financial sector, or to whiny politicians who also want rate cuts.
Employment numbers continue to be very strong, with unemployment at just 4 percent. CPI inflation has been stuck between 3 and 3.8 percent for eleven consecutive months now. The year-over-year rate was lower in October, November, January, and February than it was in May.
Today’s was a good inflation report. It is still not the time to declare victory.