ebook essays pieces of the puzzle
Wednesday, November 7th, 2012
prices and targets

The election is over (it is over, isn’t it?).  Back to work.

The preliminary third-quarter GDP came out recently.  Those watching the economic numbers parse it every which way, of course, including taking a look at the price information in the report.

In the top panel above is the “deflator,” the key inflation series that comes with the GDP data dump.  The smoother line is the year-over-year change, the jumpier one the quarter-over-quarter change (at an annualized rate).

The bottom panel shows the target for the Fed funds rate.  It has flat-lined since the financial crisis.

For the most recent quarter, the deflator jumped again.  It may well fall back next quarter (Hurricane Sandy may have something to say about that), but if it doesn’t it will bring into question the Fed’s statement about leaving rates low until “mid-2015.”

There is every reason to believe that if the Fed ever does decide to move rates higher, it will be in an incremental fashion.  That’s the way it’s been for the last twenty years, plus they’ll be afraid of moving too aggressively and derailing any recovery.

All of that lends credence to a higher chance of explosive inflation, since the Fed seems predestined to be behind the curve.  The probability may be small, but the impact would be great.  (Chart:  Bloomberg terminal.)