The Federal Reserve is moving, albeit cautiously, toward raising interest rates, arguing that the U.S. is near full employment and that inflation should rise back to its 2% target over the medium term. There are reasons to suspect that inflation will rise: survey-based measures of long-term inflation expectations, though lower than they’ve been for decades, are still above 2%; wages are picking up; and, as Fed Vice Chair Stanley Fischer recently noted, the “inflation rate this year is higher than last year’s. It’s still not up to 2%. But it’s been growing.” The Fed’s favorite gauge for inflation, the price index for personal consumption expenditures (PCE), has been rising at an annual pace of about 1.6%, up from 1.3% to 1.4% in 2015.
Recent inflation data, however, don’t show much of an increase. Headline inflation has dipped since January, and core PCE–excluding volatile food and energy prices–is about where it was (marginally lower, actually). For one to argue, as Boston Fed President Eric Rosengren has, that the U.S. has had “gradual increases,” one must measure inflation in years, not quarters. Even then, core inflation has not budged much since early 2013, despite record-busting monetary stimulus and very low interest rates.
Other measures, such as the familiar consumer price index and the Dallas Fed’s rate of “Trimmed Mean PCE,” tell a similar story. Since the start of the year, headline consumer-price-index numbers have dropped from a year-over-year 1.4% to 0.8%, and core CPI inflation in July was the same as it was in January. And at 1.62, the year-over-year Dallas Fed Trimmed Mean is lower than its January value of 1.70.
These gauges measure the changes of prices in a basket of goods and services, some going up and some going down. Inflation in personal consumption expenditures services—such as housing inflation, which has risen, and health-care inflation, which has edged down but is still positive—has, on net, been fairly stable, hovering around 2% for years. But the price of goods has been falling, and not just because of energy and food: Furniture and household appliances, recreational goods, and vehicles, among other products, have all gotten cheaper over the past year.
The bottom line: The inflation rate is higher now than it was in 2015. But over the course of 2016 we’ve seen no apparent progress toward the 2% inflation target. If anything, the inflation rate in January was closer to the Fed’s goal than in July. So it’s increasingly difficult for Fed officials to rely on current inflation numbers as a justification for raising rates. Higher inflation might be just around the corner, but we haven’t seen it yet.