Any new suggestions, Maestro?

Cast your mind back a couple of decades, if you will, to a time when Alan Greenspan was Chairman of the US Federal Reserve. It often seemed as if the main goal of Fed policy was to support the stock market -- the so-called "Greenspan put" -- rather than to focus on preserving the purchasing power of the dollar by keeping inflation low. To justify this, Greenspan scrolled through a variety of increasingly obscure price indices in order to justify his view that the traditional measures were overstating inflationary pressures.  

So, out went the fuddy-duddy, old style CPI, to be replaced first by the snazzy employment cost index (ECI).  When  that no longer served, Greenspan pivoted to the rather arcane personal consumption expenditure deflator, particularly the "core" version that excludes food and energy prices.  These indices, compiled by the Bureau of Economic Analysis at the Department of Commerce, have apparently remained favourites of the Fed ever since.

It's no surprise to learn that these indices are now flashing the same danger signals as the more widely-understood CPI. Data released by the BEA today show that the overall PCE deflator rose 6.4 percent in the year to February. The rise was led by a 25 percent rise in energy prices and an 8 percent gain for food, both of which are of course excluded from the "core" version that Greenspan particularly favoured. Even without those components, however, the core index rose 5.4 percent year-on-year. 

Current Fed Governor Jerome Powell is very evidently not cut from the same cloth as the Maestro. Today's data, coupled with the hawkish tone of recent rhetoric from the Fed, are intensifying expectations that the FOMC will raise the funds target by a full 50 basis points at each of its next two meetings.  Recall that one dissenting member of the Committee favoured such a move earlier this month; that is highly likely to be the consensus position come early May.

Briefly switching north of the border, a more aggressive Fed would make it easier for the Bank of Canada also to pursue a faster pace of tightening. The data flow continues to support that. Today StatsCan reported that real GDP rose 0.2 percent in January, despite the presence of relatively stringent COVID restrictions across the country. StatsCan further estimates that as those restrictions were lifted in February, growth accelerated to 0.8 percent, and anecdotal evidence points to continuing strength in March. 

Both the Fed and the Bank of Canada know that the current causes of inflation cannot easily be treated by monetary measures. Their key short-term goal is to keep inflation expectations in check, and that certainly points to the need for a "statement move" of 50 basis points from each at the earliest opportunity. Beyond that, all is data-dependent.