Inflation Comes Back Into the Picture for the Fed

The Federal Reserve has less to worry about. Labor Department data on Thursday showed, for the third month in a row, that inflation is warming back up. The central bank had been worrying aloud that it might be dangerously low. The overall consumer-price index rose 0.1% in August from July, putting it 1.7% above its year-earlier level, but it was held down by lower energy prices. Core prices, which exclude food and energy items to better capture inflation’s trend, rose 0.3%, putting them up 2.4% from a year earlier. That was the fastest year-over-year pace since July of last year, when the Fed was still in full-fledged tightening mode.

When inflation slipped earlier this year—by May, the core CPI was up 2% on the year and the Fed’s preferred core measure was up just 1.5%—the Fed’s initial line was that the cooling was transitory. Perhaps it should have stuck with that script. Instead, rate setters dwelled on the dangers of low inflation, using that as part of their justification for lowering rates in July. They have signaled that they will cut rates again at the Fed’s policy-setting meeting next week, and most economists expect further rate cuts beyond that. Of course, low inflation isn’t the primary reason the Fed is cutting rates. It is mainly worried that trade tensions and a global slowdown will lead to businesses cutting back on hiring, putting the economy at risk. But the inflation cool-down made cutting rates far easier. If inflation, while still low, keeps picking up, and the job market continues to do well, the rate-cutting argument will become strained. Both of those things appear likely. Some of the transitory things that weighed on inflation, such as methodology changes that pushed measured apparel prices lower, have yet to fully reverse themselves, while wage growth may lead to a further lift. Then there are tariffs, which will likely push prices up as well. Meanwhile, the Labor Department separately reported on Thursday that initial jobless claims fell by 15,000 to 204,000 in the week ended Sept. 7—hardly the sign of a troubled labor market. The looming threats to the U.S. economy may well mean more rate cuts are necessary. Until those threats start to be felt, though, justifying further cuts could get a lot harder. rite to Justin Lahart at

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