There's no inflation excuse for postponing a rate hike

If the FOMC tomorrow decides to postpone raising short-term interest rates, it won't be because inflation is "too low."

The chart above shows the year over year change in the total Consumer Price Index and in the Core version of same (i.e., ex-food & energy). The total is up only 0.2% in the 12 months ended August, and that indeed is a pretty low number. But the reason it's low is almost entirely due to the big collapse in oil prices over the past year: crude oil is down by more than 50%. If we exclude food and energy, the Core CPI is up 1.83% in the past year. When there are big swings in energy prices, the Fed shouldn't be concerned, since controlling oil prices is not part of its mandate. These days, the Fed should be focusing almost exclusively on ex-energy measures of inflation.

So here it is. The chart above shows the level of the CPI ex-energy on a semi-log scale. From this perspective, inflation today is only a hair below the 2% per year it's averaged over the past 12-13 years. If anything in this chart stands out, it is the quickening of inflation in the 2006-2008 period.

And if we look at annualized changes in the total and core versions of the CPI over rolling six-month periods, as the chart above does, then we see that inflation is actually more than 2%: the CPI is up 2.35%, while the Core is up 2.05%. I haven't shown it on this chart, but the 6-mo. annualized rate of the CPI ex-energy is 1.88%. By these measures, the Fed should already be raising rates.