11:22 am ET Dec 23, 2014
Inflation Reading Misses Fed’s Target for 31st Straight Month
By Eric Morath
Robust economic growth and strong hiring supports the expectation that the Federal Reserve will move to raise short-term interest rates next year, despite inflation trending below the central bank’s target.
Most Fed officials expect to start raising short-term rates from near-zero in 2015, with many of them pointing toward the middle of the year. Fed Chairwoman Janet Yellen said last week that Fed officials anticipate raising rates as long as unemployment continues to fall, and they are confident inflation will over time move back toward their 2% goal.
The latest inflation readings, however, show prices trending away from that goal.
The price index for personal consumption expenditures, the Fed’ s preferred inflation gauge, fell 0.2% in November and was up 1.2% from a year earlier, the Commerce Department said Tuesday. That shows an easing from last month’s annual reading of up 1.4%.
The PCE price index has undershot the Fed’s target for 31 straight months.
Even when excluding food and energy, inflation is decelerating. So-called “core” prices were up 1.4% in November from a year earlier. That’s a slowdown from October’s annual reading of 1.5%, which itself was revised down from a previously reported 1.6% gain.
The new inflation numbers alone likely won’t change views inside the Fed, but if core inflation continues to decelerate, that could be a worry.
Ms. Yellen acknowledged last week that falling energy prices will hold down headline inflation, “and may even spill over, to some extent, to core inflation.” But, she said, officials “see these developments as transitory.”
Continued strong hiring and output growth should reassure officials at the central bank that the economy can handle tighter monetary conditions, even if inflation continues to undershoot their goal.
The economy expanded at a 5% rate in the third quarter—the best gain in more than a decade—and the unemployment rate fell to 5.8% in November from 7% a year earlier.
A fall in energy prices, while dragging down overall inflation, helps consumers in the form of cheaper gasoline and supports broader economic growth.
“Having to spend less on gas and energy…it’s like a tax cut that boosts their spending power,” Ms. Yellen said.
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