MNI: Core Services Inflation Trend Uncertain - Fed's Jefferson

Core goods and housing services inflation are likely to slow, but the trend of inflation in core services excluding housing is "uncertain," Fed Governor Philip Jefferson said Monday.

"In summary, core goods inflation has started to come down. Several indicators suggest that housing services inflation is likely to come down in the coming months. There is more uncertainty surrounding inflation in core services excluding housing. Over time, we’ll learn more about inflation dynamics in this sector," he said in remarks prepared for a Harvard University lecture.

Fed Chair Jerome Powell has noted core services excluding housing prices are strongly tied to the strength of the labor market and seeing those categories slow will be key in bringing inflation back to target. (See: MNI INTERVIEW: Fed Hikes Just Starting to Weight on Jobs-KC Fed)

Food inflation has slowed somewhat while energy prices have fallen noticeably, Jefferson added. But "because energy prices are shaped primarily by global developments and not by U.S. monetary policy, there is a lot of uncertainty about the future course of energy inflation."

HIGHER INFLATION TARGET

Jefferson also noted that raising the Federal Reserve's inflation target from 2% would risk hurting central bank credibility, and "more vigorous" macroprudential policies might be more effective in reducing the likelihood of financial crises and the severe recessions that could follow.

Changing the inflation target could hurt the economy in the long run "by calling into question the FOMC’s commitment to stabilizing inflation at any level because it might lead people to suspect that the target could be changed opportunistically in the future," he said.

"If so, then these reputational costs will undermine the key benefits of well-anchored longer-run inflation expectations discussed above: an increased ability of monetary policy to fight economic downturns without sacrificing price stability."