The Fed’s mission is to not let a relative value story turn into an inflation story.
When food/fuel prices rise, consumers have less to spend on other things; so, they should moderate to keep it all a relative value story.
But even though core CPI hasn’t gone up as fast as headline (YET), it has gone up to 2.3%. Rather than stay the same or go down; so, the relative value story is slowing turning into an inflation story.
And my guess is that most of Congress isn’t going to like the idea that the Fed’s job is to keep wages ‘behaving’ (suppressed) when food/fuel goes up, as Poole states below:
Poole Says Fed Needs to Help Prevent Wage Increase
by Kathleen Hays and Timothy R. Homan
(Bloomberg) The Federal Reserve needs to prevent the public’s expectation that inflation will accelerate from spurring demands for higher wages, William Poole, former St. Louis Fed President, said today.
“You want to keep wages behaving,” Poole said in an interview on Bloomberg Television. Once the public’s anticipation of rising prices begins to stoke demands for higher wages, “the jig is up” and inflation becomes harder to eradicate.
The public’s outlook for annual inflation over five years stood at 3.4 percent in June, up from 2.9 percent the same month last year, according to the Reuters/University of Michigan Survey.
Comments by Fed Chairman Ben S. Bernanke and other policy makers this month have compelled traders to increase bets the central bank will start to lift the main lending rate later this year to keep rising food and energy costs from influencing labor agreements and other prices.
“We should be moving sooner rather than later,” Poole said, referring to an interest-rate increase.
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