FINALLY, A CLEARER PICTURE OF INFLATION / THE WALL STREET JOURNAL

Finally, a Clearer Picture on Inflation

Last year’s bout of weak inflation figures really was transitory, just like Janet Yellen said

By Justin Lahart
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The Federal Reserve Building in Washington, D.C. Photo: Pablo Martinez Monsivais/Associated Press 


Janet Yellen can take a victory lap about inflation on her way out as Federal Reserve chairwoman. She has been saying the weakness in last year’s inflation readings was transitory, and she was right.

That clears the way for the Fed to raise rates at least the three times it expects to this year. That would surprise investors who have been skeptical of inflation and higher rates.

The Labor Department on Friday reported that overall consumer prices rose 0.1% in December from the previous month, but the real news was the 0.3% rise in prices excluding food and energy items—the so-called core that economists watch to gauge inflation’s trend. Core prices were up 1.8% versus a year earlier, and even if inflation moderates, the annual figure will should be more than 2% by April.

CORE VALUES
Change in consumer prices excluding food
and energy ítems from a month earlier

The Fed would hardly count such a pickup in inflation as dangerous. What is important is that any doubts among Fed policy makers about inflation are in the past and Friday’s report should make them a lot more comfortable with raising rates.

The numbers also set a higher starting point for inflation at a time when wage growth should accelerate—something that seems likely with all the raises and $1,000 bonuses companies are doling out. There is now a strong possibility for four quarter-point rate increases this year.

Investors are starting to get it—two-year Treasury yields are now at their highest level since 2008. But interest-rate futures imply investors only expected two and a half rate increases. You aren’t supposed to fight the Fed, but that is exactly what some people are doing.