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No-show inflation poses 
conundrum for US Federal Reserve

This article is more than 12 months old

WASHINGTON After tightening monetary policy last month for the second time this year, the US central bank is expected to pause for the next few months to monitor developments.

The Federal Reserve will leave the benchmark interest rate untouched when it meets on Tuesday and Wednesday, partly because it has yet to begin to wind down its huge stock of bond holdings and will not make another move on interest rates until that process is underway.

But the Fed also faces a growing conundrum as it waits for signs of long-absent inflation to finally appear.

As an economy recovers and hiring increases, it brings with it rising wages and inflation which, in turn, prompts the central bank to hike lending rates to keep prices in check while still allowing economic growth to continue.

But despite nearly seven years of uninterrupted job creation and a very low unemployment rate of 4.4 per cent, inflationary pressures and wage gains show little sign of life.

The central bank is running out of explanations.

While the Fed is expected to implement one more rate increase late this year, there are divisions among policymakers on the timing.

Minutes from the June meeting of the Federal Open Market Committee, the Fed's policy-setting panel, show several members were not "comfortable" with plans to increase rates again this year.

Fed Chair Janet Yellen told Congress this month that the central bank was not blind to the data showing inflation stubbornly below the central bank's two per cent target.

Ms Yellen and other economists have pointed to a series of one-off explanations, including lower drug prices and costs for mobile phone plans, some of which will continue to make their impact felt on the annual inflation rate for some months.

The "core" measure of the Personal Consumption Expenditures (PCE) price index - the Fed's favourite inflation indicator - has been below the central bank's two per cent target for five years.

Last month, the headline PCE price index contracted for the second time in 2017.

The Consumer Price Index also came in flat in June after contracting in May, dragging the 12-month measure down more than a full percentage point in the last four months.

Economist Diane Swonk said another explanation is price competition among online retailers, which also has been persistent in other advanced economies like Japan and Germany.

And even amid growing reports that companies have open positions but cannot find qualified workers to fill them, wage growth has been sluggish at best, at 2.5 per cent.

But with only modest growth, including in manufacturing, Tim Duy, an economist at the University of Oregon, said that the Fed was under no pressure to move again until December.

"They can simply continue to maintain their current story and wait to see how the data plays out," he said.

- AFP

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