The inflation rate ticked up slightly in July, but it’s basically been flat since the end of last year and is considerably under the peaks of 2018. However, the core inflation rate, which excludes erratic food and energy prices, continued its yearlong level above the headline rate as well as its two-year resistance to falling below 2 percent:
The Fed pays primary attention to the core inflation rate under the theory that the headline rate will eventually move toward it. It’s a pretty good theory, but at the same time, a two year-average just a hair above 2 percent is still not something to worry too much about. And more to the point, even though core inflation has increased for the past two months in a row, it shows no real sign of acceleration.
A core inflation rate above 2 percent is one reason the Fed is being cautious about stimulating the economy. If I were king of the world I’d suggest the Fed get cautious only when the core rate rises above 3 percent for a while or shows signs of significant acceleration. But I am not king of the world.