Friday, September 16, 2016

August 2016 CPI Inflation

A bump up in inflation this month.  Shelter inflation continues to rise.  Core inflation without shelter rose to 1.6% this month.  This probably gives more cover to the Fed to raise rates.  Looks like markets reacted negatively to the report.

I guess people actually believe that 2 1/2% inflation created an economic upheaval in the 2000s, so since inflation is above target in a category that literally involves no cash and no actual transactions, we need to reduce the amount of cash in the economy to counteract it.

Here are the month-over-month and year-over-year inflation charts.

I wonder what the effects of a tightening will be.  Normally, there would be a fairly direct link to currency in the economy, but since the source of control now is interest on reserves, instead of entering the economy through bond holders, currency would have to enter (or leave) through banks' credit decisions.

I don't know.  Does it make much difference?  How would we know what the effect of a policy shift would be?  The levels of currency, excess reserves, and credit, are due to a complex mix of factors.  Do any readers have links to, say, Fed research on what exactly they would look for to know what sort of effect rising interest on reserves was having?


  1. Nice post. We face the orospects of a banking system that is paid to do nothing.

    I see no moral hazard in that.

    1. Great point about moral hazard. I'd add, cronyism. I wish we'd go back to the days when IOR wasn't permitted. Barring that, the max IOR payable should be the lowest rate being paid on T-bills of 1 month or less.