Goldilocks? Not likely

If you recall, I recently highlighted the reacceleration of M2 growth:

…M2 reaccelerated in 2006 and is trending higher. This likely means a higher, not lower, Fed Funds rate in the future.

Nevertheless, many have been heralding the “Goldilocks” economy of low, stable inflation and growth around potential. The latest inflation data, however, suggests that Goldilocks is a fairy tale, both in literature and in reality. The Wall Street Journal reports:

The consumer price index rose 0.2%, the Labor Department said Wednesday. The CPI increased 0.4% in December. Core inflation, which is consumer prices excluding food and energy costs, increased by 0.3%, after rising 0.1% during each of the three previous months.

[...]

Core prices rose 2.7% in the 12 months ending in January 2007.

Bernanke is not likely to see 2.7% as a low rate of inflation. I still believe that the next move in the Fed Funds rate is higher.

2 responses to “Goldilocks? Not likely

  1. I’m not going to tangle with my betters on monetary policy, but “Goldilocks” Kudlow himself was discussing inflation with Art Laffer and Brian Westbury the other night. Laffer and Kudlow are quite convinced that growth of money supply as a share of GDP is at multiyear lows.

    Westbury, cast as the inflation hawk wasn’t very reactionary. Gold says inflation, the bond market says no, Laffer explains Gold as a proxy for the weak dollar.

    IS it realistic to assume that the bond market is going to completely miss the inflation you perceive?

  2. Pingback: Ritholtz on Gold « The Everyday Economist

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