I’m travelling today, but I have to at least toss up a quick inflation chart, via WSJ. Note that the inflation ex-inflation perspective still permeates the thinking of the Fed (and others):
WSJ: "High energy prices, a potential shift in public psychology toward accepting higher prices, signs that businesses are using up spare capacity and a steep federal budget deficit combine to make Federal Reserve policy makers more nervous about the inflation outlook. A pause in rate increases the next few months, considered a real possibility after the economic disruption caused by Hurricane Katrina in late August, looks increasingly unlikely. Indeed, the Fed may raise rates even further than it had thought likely before Hurricane Katrina struck.
Futures markets have responded by signaling they expect the federal-funds rate, the amount financial institutions pay on overnight loans, to reach 4.5% in mid-2006. A month ago, the futures markets were predicting the federal-funds rate then would be below 4.25%. The current rate is 3.75%.
Energy: For years, Fed officials usually focused on "core" inflation, a measure that excludes food and energy prices. That is because volatile energy prices often push the overall inflation rate up or down without changing the underlying trend.
But energy prices have been rising more persistently, and markets see little reversal in the next few years. That makes increases difficult to discount. Officials worry higher energy costs could spill over into core inflation, which was running at just 2.1% in the year through August. Overall inflation was 3.6% . . ." (end of excerpt)
The rest of the column discusses inflation expectations, capacity constraints and budget deficits; its definitely worth your time to read in its entirety.
One housekeeping note: With this post, I very belatedly add a category called Inflation; previously, Fixed Income was the sub-category these sort of posts went under.
Interest-Rate Expectations Rise as Fed Picks Up More Signs of Inflationary Pressure
THE WALL STREET JOURNAL, October 10, 2005