Three Reasons The Fed Should Be Concerned About Low InflationDecember 03, 2013
There are at least three reasons why the Federal Reserve should be concerned about the recent low inflation readings in the US:
1) About a year ago, inflation started to diverge below a 2% trend line. Over the last year, core inflation has undershot the Fed’s 2% target by alomst half.
2) The breadth of inflation is dropping. Over the last year, only 14 out of 26 categories experienced increasing prices. This is down from 26 out of 26 at this time in 2011.
3) The US is just starting to experience the lagged impact of Yen devaluation. This is probably the likeliest culprit for the recent undershooting in inflation to begin with, and our models suggest only about half the effect has been experienced so far.
The auto industry is an easy example of the kind of pricing pressure the US is experiencing from imported inflation.