Federal Reserve hits inflation target

8/15/2013 10:11:00 AM
Quick thought on today's release of July 2013 CPI data: the new estimate shows that in July relative to a year earlier, prices rose 2.0%. This is the first time that inflation has hit 2.0% since last year, and even then it was only for a single month in 2012--the Fed has failed to sustain a rate of inflation at or above this threshold for a while now.

2.0% inflation is an important threshold because it corresponds to the now-explicit inflation target, which was made public for the first time on January 25 2012. Much of the econosphere has complained that the Fed is allowing inflation to be consistently less than the inflation target; indeed, since the target was announced in January 2012, inflation has been consistently below target, implying that it is not a target in a true sense, but a ceiling.

In an update on "tapering" from St. Louis Fed president James Bullard says
"Forward guidance is a promise to keep the policy rate near zero at least until unemployment falls below 6.5 percent or inflation rises above 2.5 percent."
which has me thinking about this graph:
Actually, at the time of the announcement of the inflation target it appeared that "tapering" was immanent--the CPI was already over 2.5%, and the year-over-year PCE deflator, which is the inflation measure that the Fed actually targets, was at 2.4% and poised to surge past the target threshold.

But then it didn't. And I'm not sure FOMC got the message.