Today's higher-than-expected U.S. inflation results suggest that the Fed can forget about deflation worries for now, economists say.
Just days ago, the FOMC minutes from the Jan. 28 meeting revealed that deflation was a concern, with the board members putting forward an unofficial 2.0% target over the long term.
Following Friday's inflation results, however, Sal Guatieri, economist at BMO Capital Markets, said that "The Fed can wipe the deflation beads from its forehead for now."
Today's inflation results showed core annual inflation at +1.7% annually, against expectations for a +1.5% result. Monthly core inflation was also higher than expected, at +0.2% against forecasts for a 0.1% jump.
Despite today's rise in inflation, Guatieri said core inflation should continue to trend lower in the coming months, as retailers are forced to keep employing sharp discounts to inspire consumer spending.
Paul Ashworth, economist at Capital Economics, said that aside from retail discounting, higher unemployment and lower wages will also put downward pressure on inflation.
With deflation concerns likely on the back burner, and the Federal Reserve now printing money and injecting tons of liquidity into financial institutions, concerns could arise as to whether such drastic actions will lead to higher inflation. Moreover, with the necessity of keeping interest rates low amid a credit freeze - the Fed could see its hands tied in the event of high inflation.
Ashworth said that for now, the money the Fed is injecting is only "imaginary" in that it exists in the banks' deposit accounts. He said, only when banks convert the money into cash and lend it out will it enter the real economy.
Even then, he said, more cash in the economy could mean an increase in GDP, not prices.
"More money will create more activity rather than high prices," he said, adding that either way, inflation concerns are at least 12 months away.
Millan Mulraine, economist at TD Securities, agreed. "We're of the view that [high inflation] certainly is a concern but it's a concern that is a few months removed from now," he said.
Even if inflation rises as a result of Fed actions, the primary concern will remain economic growth, he said.
By Megan Ainscow and edited by Sarah Sussman
©CEP News Ltd. 2009