They're all drinking the same Kool-Aid. Federal Reserve officials, one and all, are touting an unimpressive economic recovery sometime around mid-year. While we won't hear from the top dog until tomorrow, it's clear policy makers aren't bracing for any unexpected strength.
They better not be. With a federal funds rate at 1.75 percent and core inflation pushing toward 3 percent, there isn't much room for error.
I know what you're thinking. Dumb cluck, hasn't she seen the capacity utilization rate dive to an 18 1/2-year low? When the economy grows below potential, when there's plenty of slack, inflation tends to fall, not rise.
So what's with the core CPI? Pardon my indifference to Fed Chairman Alan Greenspan's preferred mouthful of an inflation measure -- the personal consumption expenditures price index excluding food and energy -- but if the consumer price index is good enough for the old folks' Social Security checks, it's good enough for me.
The year-over-year increase in CPI excluding food and energy hit a 5 1/2 year high in November of 2.8 percent, even as the plunge in energy prices sent the overall CPI decelerating to a 1.9 percent increase from 3.7 percent in January last year.
Last year, when energy prices were high, rising inflation was said to be "just energy." So why is the all-items CPI excluding energy at a 5-year high of 2.8 percent? And what about the CPI for services excluding energy services, which posted a year-over-year increase of 4 percent in November, the biggest jump in eight years? While the economy first contracted in the third quarter of 2001 -- the National Bureau of Economic Research's dating committee dated the recession to March -- it's been growing at crawl speed since the third quarter of 2000.
Starting with that quarter, real GDP rose an annualized 1.3 percent, 1.9 percent, 1.3 percent and 0.3 percent before falling 1.3 percent in the third quarter of last year. The median forecast for fourth quarter GDP is a decline of 1.4 percent, according to a Bloomberg News poll of 42 economists taken in mid-December.
The agglomeration of slow- and no-growth quarters should be taking the edge off inflation by now. Lagging indicator that it is, inflation peaks on average two months after the economy using data back to 1959, according to the Conference Board.
The particular inflation measure included in the Index of Lagging Economic Indicators is the CPI for services, calculated on a six-month annualized and smoothed basis. So calculated, services inflation fell from 5 percent in June to 2.8 percent in November.
But as Bureau of Labor Statistics economist Pat Jackman told me last month, the decline was driven by energy. Core services prices, calculated on a six-month annualized smoothed basis, peaked in June at 4.3 percent and ebbed to 4 percent in November.
So not much progress on that front.
"Inflation should have broken already," says Jim Glassman, senior economist at J.P. Morgan Chase. "Goods have crashed while wages and services have not." Glassman says the pattern is similar to one observed twice before, in the mid-1980s and mid-1990s.
"In both cases, the gap between goods and services was eventually resolved with services coming down," he says.
If the same pattern holds true this time around, the Fed will be in no rush to reverse course, Glassman says. "Unless the economy rebounds more briskly than most people believe."
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