Friday, October 28, 2005

So, Besides in Energy, Where's Inflation?

By Campion Walsh and REBECCA CHRISTIE


...Within the advance GDP report, the personal consumption expenditures, or PCE, price gauge excluding food and energy rose 1.3% in the third quarter, down from 1.7% in the second quarter and well below the first quarter rate of 2.4%. Federal Reserve policymakers closely watch the core PCE as an inflation indicator...

By Campion Walsh and Rebecca Christie; Dow Jones Newswires

Inflation is decelerating, not accelerating. Remind me again why the fear of it is rising? Is filling up the tank once or twice a week really having that much of an impact on the psyche? (by the way, premium gas cost me $3.35 a gallon about six weeks ago and it's $2.80 today.)

Ten-year Treasury investors seem to believe that inflation is under control based on the prices they pay and the yield they are willing to accept. Low long-term rates are good for economic growth in most cases. There is one scenario, however, that low long-term rates will not boost the economy: When short-term rates rise enough to make the yield curve flat or inverted, banks have little incentive to lend and capital providers have little incentive to provide capital. That leads to slower growth.

The Fed's action to increase short-term rates, while long-bond investors keep long-term rates low, has flattened the yield curve. Given the diminishing evidence of core inflation, the Fed runs the risk of causing a recession. Then, inflation will be last on everyones' list of fears.


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