A decision by the Federal Reserve to start scaling back its asset purchases next month is heavily dependent on confidence among US central bankers that inflation will gradually pick up and move closer to 2 per cent.
But data released yesterday by the labour department offered no such assurance. The producer price index (PPI), which measures inflation for businesses excluding volatile food and energy costs, edged up by only 0.1 per cent in July, and has increased by a modest 1.2 per cent over the past year – well below the Fed’s target.
Fed officials have always banked on soft inflation as a temporary phenomenon that will gradually revert towards normal levels. But the longer it continues, the more concerned they might become about the dangers of disinflation – a slowdown in price rises – or even a slide towards deflation.