In this week's release of the minutes from its April 29-30 meeting, Federal Reserve policymakers made clear that they see little chance of inflation moving past their 2% target for years to come. In order to make such a bold statement, Fed economists not only had to ignore the current data, but discount the likelihood that their current stimulus will put further upward pressure on prices that are already rising.
Even if you believe the highly manipulated government CPI data, April's year over year inflation rate came in at 1.95%, a statistically insignificant difference from the Fed's 2% target. If annualized, April's monthly change would equate to a rate closer to 4%. On the producer side, the numbers are even worse. Last week the Producer Price Index (PPI) came in at .6% for April, after notching up .5% in March. These two months together annualize at 6.6%. So already there is very little wiggle room, if any, before the Fed reaches the point where even its dovish leaders should admit that inflation is a problem.
But like most modern economists, leaders at the Fed deny Milton Friedman's famous maxim that inflation "is always and everywhere a monetary phenomenon." Instead they like to think of it as a kind of pesky but necessary byproduct of economic growth. (Recently the theory has gone even further, mixing cause and effect to determine that inflation causes economic growth). If this were so, then the Fed would have a lot to worry about if its economic forecasts can be trusted.
Despite the muted economic statistics over the last few months, the Fed has not backed off Janet Yellen's 3.0% forecast for 2014 GDP. The near zero growth we saw in Q1 (likely to be revised negative) has not convinced her, or anyone at the Fed, to ratchet down this estimate. So to hit that target, growth for the remainder of the year will have to come in close to 4% per quarter.