Inflation has begun picking up, and it looks as if the Federal Reserve is going to let it keep climbing.
The Labor Department on Tuesday said that consumer prices rose by 0.3% in September from August, putting them 1.5% above their year-earlier level. With gasoline prices stabilizing, annual inflation ought to push above 2% on the year within a couple of months.
Core prices, which exclude food and energy costs, have been there for a while. Last month they were up 2.2% on the year.
The Fed has a 2% inflation target, but it prefers a separate, Commerce Department price index that tends to run cooler the Labor Department’s measure. Even so, with job-market strength steadily boosting consumer’s spending power, this measure, too, may also show inflation above 2% sometime in the year ahead. As of August, it showed overall prices up 1% on the year, with core prices up 1.9%.
The Fed’s typical response has been to get in front of inflation before it picks up, but that approach was crafted when inflation was running higher than today. Lately, some Fed officials have been arguing that the central bank should delay raising rates until inflation is close to 2%. Fed Chairwoman Janet Yellen herself said last week that letting the economy run hot for a while might have some benefits.
None of this is enough to take a rate increase at the Fed’s December meeting off the table. But it does mean that, even as prices pick up, further rate increases will be slow to come. Investors accustomed to inflation running below the Fed’s target may be in for some retraining.
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