Is inflation back in the game?

During most of the current economic recovery of the Great Recession, one of the major issues has been … where is inflation?

Sometimes there were even concerns, especially in Europe, about the possibility that deflation would become

Even during three cycles of quantitative easing in the United States and a rate of unemployment lower than what many saw as full employment, the inflation rate seemed rather timid. Friday, it changed for many people

On that day, the Commerce Department released data on the two consumer price indices that the Federal Reserve is monitoring very closely. The Fed's inflation target is 2.0%

The overall measure of consumer prices showed a growth rate of 2.3% from a year ago to the other for the month of May. Although this particular measure jumped several times by 2.0%, there were no signs that it would stay around or above that level.

The most crucial measure of inflation is the consumer price index excludes food and energy prices because of their volatility, and the month of May has overtaken of 2.0% the level of the index in May 2017.

This is the first time in recent years that this basic measure reaches the level of 2.0%

Justin Lahart writes in the Wall Street Journal: "So, after years of frustration at stubbornly low inflation, mission accomplished for the Fed."

Well, Mr. Lahart may be exaggerating. After all, it is just a month 's accomplishment.

After all, since May 2011, this basic measure of consumer price inflation has averaged only 1.3%, even to this extent supposed to be more stable than the total . However, Mr. Lahart insists that there are many reasons to believe that the inflation rate will remain around two percent … or even rise to the price index at the consumption.

Even Federal Reserve officials believe, on average, that core inflation will be 2.0% for 2018 and will reach a level of 2.1% for 2019 and 2020

it seems that inflation has picked up and, over the next few years, will test Federal Reserve decision makers to keep the core inflation rate under control.

Remember, the Federal Reserve, as far as we know, is data driven

Fed Chairman Jerome Powell recently reiterated this fact. At the press conference after the latest rate hike, Powell insisted the Fed would "cool down" if inflation continued to exceed 2%. "

What does it mean? Well, Fed officials have already signaled that there would be two further increases in the rate of political interest this year and that this is not the case. there would be three further increases in 2019.

In addition, the Fed is reducing the size Financial markets seem to have incorporated these expectations in the pricing of financial assets

But Mr. Powell seems to indicate to participants to the market that these expectations might be disappointing if data position different policy.And, if the data support a different policy, market participants must understand that the Federal Reserve will not hesitate to tighten if necessary.

And , what does it mean?

More interest rate hikes in the shorter term

A greater effort to reduce the size of the Fed's securities portfolio … and the Fed's balance sheet. .. at a faster pace?

In a real sense, it's the "new" Fed that has evolved since the early days of former Fed Chairman Ben Bernanke. Bernanke was still the one who believed the Fed needed to signal to the market what the Fed was aiming for. He thought that by doing so, and by supporting the action discourse, the financial markets and the banking system would more easily adapt to what the Federal Reserve was trying to achieve.

During Mr. Bernanke's tenure at the Fed, the "forward guidance" process became more and more common as the Fed gained more and more credibility by actually following "forward guidance" with its effective management of its balance sheet

. a consistent component of the Fed's monetary efforts took place as the third round of quantitative easing came to an end. The Federal Reserve has signaled that it would begin to raise its interest rate manager, even if it would not achieve it through sales or purchases of open market securities.

The Fed has instead resorted to instruments such as reverse repurchase agreements. term deposit facility, temporary means, to manage its balance sheet and achieve its interest rate objectives.

Last October, the Fed entered the second phase of this effort by abandoning these tools in the short term. The Fed did a very credible job throughout this period to inform market participants of what was going on. she was going to do and then do what she told the market participants.

Now, Mr. Powell points out that this stage of the Fed's monetary policy may be over.

We have been monitoring this signal for a long time, since Mr. Bernanke appeared at one point. August meeting in Jackson Hole, Wyoming, and presented the move away from quantitative easing.

The Fed's shares since that earlier date have always aimed to err on the side of the monetary facility in order to reduce the possibility of further disruption to the commercial banking sector. The banking sector has benefited, the economy has benefited, and especially the stock market has benefited.

If inflation is back in the game, all the game could change with the Federal Reserve in the foreground. The position to look for: political movements to withstand the rise in inflation, which would replace a monetary policy effort to support a growing stock market

Disclaimer: I / we have no position in the shares mentioned, and plans to initiate positions in the next 72 hours.

I myself wrote this article and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have a business relationship with a company whose title is mentioned in this article.