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Inflation heats up (cont.)




The personal consumption deflator in May came in as expected at 0.2%, but the core version was a bit higher than expected at 0.3%. As this chart of the six-month annualized rate of change of each series shows, inflation is definitely picking up on the margin, regardless of how it's measured. So far this year the core PCE deflator is up at a 2.3% annualized pace. It's notable that both core and headline inflation are moving higher at the same time, since this confirms that monetary policy is definitely accommodative. If policy were tight, then higher oil prices would be pressuring other prices to decline, and we would be seeing core inflation falling while headline inflation was rising.

Inflation is now high enough to justify the Fed's decision to forego QE3, and high enough to begin to justify the concerns of those who worry that the Fed may have been too easy for too long. Deflation is dead, of that we can be sure.

UPDATE: The bond market responds to the news by steepening, sending sensitive, forward-looking inflation expectations higher.

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