Anyone who’s paid attention to the Federal Reserve for a while knows that its economic forecasts often are off the market. The Fed frequently overestimates inflation and growth. That’s especially true the last few years. Chairman Janet Yellen admitted over the weekend that the Fed’s been surprised by inflation. In a normal economic cycle, inflation would be much higher at this point. The Fed overlooked the other factors, including those leftover from the financial crisis, that give a deflationary bias to the economy. Yellen also said the Fed plans to increase rates steadily, because it expects inflation to increase soon.
“The biggest surprise in the U.S. economy this year has been inflation,” Yellen said on a panel that included Bank of Japan Governor Haruhiko Kuroda, People’s Bank of China Governor Zhou Xiaochuan and European Central Bank Vice President Vitor Constancio.
While the Fed chair said she expects a pickup, she and her colleagues “recognize that this year’s low inflation could reflect something more persistent than is reflected in our baseline projections.”
Inflation came in at 1.3 percent in August after stripping out volatile food and fuel, well below the Fed’s target. It has been headed in the wrong direction for months, and data through the end of the year will be unreliable, clouded by seasonal adjustment issues and price fluctuations wrought by hurricanes that hit the U.S. South late this summer.