Here’s what has the Fed worried

Even though the job market has been picking up, the Federal Reserve is still worried about the specter of deflation — a period of falling prices. And that’s why it declined to raise short-term interest rates at its most recent meeting.

Federal Reserve Chair Janet Yellen
Federal Reserve Chair Janet Yellen

If you know anyone who lived through the Great Depression, you’ll know that falling prices are a terrible thing. As prices fall, companies have to cut prices to produce goods. Typically, that means cutting wages. When wages fall, people can afford fewer things, and prices continue to fall. It’s a miserable cycle of poverty for working people.

But wait, you say. Rents are going up. Car prices certainly aren’t falling. And any number of things that you buy day to day — like, say, a burrito at Chipolte — are increasing. All true. In fact, if you exclude food and energy from the government’s Consumer Price Index, prices have gained 1.8% since June 2014.

As people like to point out, food and energy is a big darn exclusion. Food prices have risen 1.8% the past 12 months. But energy prices have fallen 15%. We’re in the middle of the longest gas price slide since January. And a gallon of unleaded now averages $2.69 a gallon, 83 cents less than a year ago. If you fill your 14-gallon tank once a week, that’s an annual savings of nearly $604.

But what probably worries the Fed is not falling oil prices, which is generally regarded as a Good Thing by the average consumer. Here’s a chart of copper prices the past three months:







Here’s what silver looks like:







Here’s cattle prices:







A few charts don’t necessarily bode deflation. But they could bode slowing economic activity. If that’s the case, raising interest rates would simply slow the economy further.

By this time, even hermit Japanese soldiers from World War II have figured out that the Fed will raise interest rates sooner or later. By and large, the stock and bond markets have priced in a 0.25% interest rate hike sometime between now and the end of the year. But the odds of any sudden increase in rates seem increasingly long, at least as long as there’s the faintest whiff of deflation in the air.



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