How worried should we be by rising US inflation? Not at all, according to Janet Yellen. The chairman of the Federal Reserve appears blissfully unconcerned at the upward trend in America's cost of living. Quizzed about it last week, the woman who runs the world's most powerful central bank said it was a case of the recent data being "noisy".
This insouciance may come back to haunt Yellen. She may be right, but there are three good reasons why rising inflation is worth taking more seriously than it is by the Fed.
The first is that it is not just inflation as measured by the consumer prices index that is going up. It is inflation as measured by the producer prices index, as measured by the personal consumer expenditure deflator (the yardstick of choice for the Fed), as measured by the monthly survey of small businesses, and as measured by the Institute of Supply Management. The latter was out yesterday and showed that industry was paying more for its fuel and raw materials and charging more for goods leaving factory gates. If this a case of noise, there's one heck of a din out there.
The second reason to care about inflation is that the US economy is bouncing back from its weather-induced soft spot in early 2014. Output is going up and unemployment is coming down. Recovery from the deep recession of 2008 is still incomplete, but output is already well above its previous peak. In the UK that milestone has only just been reached.
Even so, the Fed is still stimulating activity both by holding official interest rates at barely above zero and by buying bonds through its quantitative easing programme. QE is being tapered away, but the electronic printing presses are still operating. Central banks, despite what they say, do not know for sure what the long-term impact on inflation of all this money creation will be. That's the third and final reason for taking inflation seriously.
Nick Parsons, head of strategy at National Australia Bank in London, says rising US inflation is going to be the next big focus of market attention. In that respect, it doesn't really matter what Yellen thinks. All that's required for some fun and games in the equity, bond and currency markets is for the markets to think that she is being too complacent about inflation. Which they increasingly do.
