For years it seemed that no matter how many trillions the Fed created, the financial system sucked it up with no effect on consumer prices. But now that Twilight Zone is apparently at an end. Using the government’s own numbers, annual CPI growth has been steadily increasing since late 2015, and for the last two years it has been in the “normal” range of 2% – 3%. Unless things turn around drastically, the Fed has run out of options; it will have to keep hiking interest rates.
The chart above (which I generated at the St. Louis Fed’s website) shows the 12-month percentage increase in the official Consumer Price Index (CPI). In late 2015, CPI was about the same as it had been a year earlier (that’s why the growth rate was at the 0% line–the black line in the chart above).
But from that point forward, CPI growth steadily increased (see the red arrow). For all of 2017 and through the present, 12-month CPI growth has been between 2% and 3% (shown by the green corridor). As the chart indicates, that is a “normal” rate of price inflation going back to the early 1990s.
Especially with the official unemployment rate below 4%, if this pattern continues, it will be very difficult for Chairman Powell and the rest of the Federal Reserve Open Market Committee to postpone rate hikes. Of course we don’t have a crystal ball, but it appears that the “grace period” for massive monetary inflation following the 2008 crisis has ended. The Fed needs to continue its so-called normalization to assure markets that it will keep (price) inflation under control.
But as the recent turmoil in the stock market underscores, continued rate hikes are the trigger that will upset this fragile economy.