Does Low Inflation Mean More Stimulus?

Written By Brian Hicks

Posted May 9, 2013

If you pay attention to what the Fed has been doing to help put the economy back in motion as of late, there’s no way to ignore the fact that not everything has performed according to plan. With new numbers coming out recently in regards to the country’s inflation rate, many are wondering what this means in terms of the future of the stimulus.

bernanke_wdIn trying to create a true target goal for inflation, the Federal Reserve initially decided 2% was reasonable. Numbers are now showing that the rate of inflation in America is actually closer to half of this, failing to reach anywhere near the goal set by the Fed.

This has many analysts pondering whether or not it may actually be necessary to bump up the Fed’s bond-buying program – one that is already quite extensive. 

Many believe if the drop in inflation continues to persist, monetary policy may need to be set in place to reach for goals lower than the 2% originally planned. With unemployment rates not declining quite as much as expected either, it becomes clear just how much of a perfect storm all of this is.

Hence, the Fed is doing everything in their power to ensure that inflation remains on task to meet the proposed goals, even if things haven’t quite been looking up lately.

An Interesting Conundrum

Trying to decipher exactly why inflation hasn’t increased according to plan isn’t quite as easy as one might think.

Take the Consumer Price Index (CPI), for example. The CPI has actually seen an attractive increase recently, which doesn’t exactly mirror the concerns that many have over the lack of inflation.

One of the reasons for this is because many people focus primarily on Personal Consumption Expenditures (PCE) rather than on the CPI. This creates a problem in and of itself, as the two simply don’t paint the same picture 

Consider the CPI. This indicator of economic health focuses far more heavily on price increases/decreases in real estate, food, and similar commodities. Since pricing has seen improvements within the past year in both of these areas, it would make sense why the CPI has seen a number of benefits.

The PCE, on the other hand, deals with an entirely different financial bracket, hence skewing the overall comparison in a variety of ways. It’s also important to note that the PCE tracks consumer spending patterns at a much quicker rate than the CPI, which explains why major shifts show up more frequently in the former of the two indexes.

The Future of the Stimulus

Much of the talk regarding inflation’s inability to meet the Fed’s goals has centered around what all of this means for the future of the stimulus. The Fed’s bond-buying program is already aggressive, which has many people wondering: can it really get any more in-depth?

Analysts believe that yes, it can. Inflation is a good thing to an extent, although many are inclined to lean with the notion that excessive inflation can actually cause far more harm than good. If the Fed’s bond-buying program does indeed ramp up, however, it could turn out to be an important factor in helping the goal of 2% to be reached sooner rather than later.

It should stand to reason that plenty of investors are wondering what the future of the stimulus will mean for gold and silver. If the dollar is to gain as expected by those who are hopeful for the stimulus’s effect, gold and silver are likely to slump. 

This being said, there’s no telling whether or not the dollar will actually continue to inflate, especially given the fact that inflation rates have been so low recently. If the Fed were to increase its stimulus program, gold and silver could easily see an increase in pricing.

Inflation is a tricky thing, and it’s not always easy for even the most expert analysts to predict how things will go. If the Fed does decide to go with an increase in the stimulus, it’s possible that an increase in inflation rates could be seen quite quickly. 

Nevertheless, jobs and inflation numbers have yet to hit a mark that anyone can be extremely excited about, even if the economy is experiencing a boost in relation to recent years.


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