Federal Reserve (Fed) Bank of Chicago Chairman Austan Goolsbee noted on Friday during an interview with Yahoo Finance that while interest rates may continue to decline, interest rate movements depend on continued taming of inflation in services.
The most crucial information
- The CPI data contained encouraging elements and some concerns.
- We continue to see quite high service inflation.
- I hope we have seen the peak impact of tariffs.
- Strong January labor market data is hopefully a sign of stability. The labor market is stable and cooling only moderately.
- I think interest rates may come down a bit more.
- We just need to see progress on inflation.
- Interest rates may continue to fall, but progress on inflation is needed.
- The most powerful thing in the economy is the American consumer.
- Consumers should hold on if the job market stabilizes and inflation declines.
- I’m still cautious. Inflation in services is not under control.
- Services inflation well above target is a danger sign. I want more information before making cuts at the beginning.
- I don’t know how restrictive the Fed’s policy is. I still think it would be wiser to wait until December.
- We need to see improvement in inflation. I expect progress.
- If inflation stays at 2%, we can make a few more cuts.
Frequently asked questions about inflation
Inflation measures the raise in prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a monthly (m/m) and annual (y/y) basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure economists focus on, and it is the level aimed at by central banks, which are required to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (m/m) and year-on-year (y/y) basis. Core CPI is the figure that central banks target because it does not include variable spending on food and fuel. When core CPI rises above 2%, it typically results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite situation occurs when inflation falls.
While it may seem counterintuitive, high inflation in a country causes the value of its currency to raise, and vice versa for lower inflation. This is because the central bank usually raises interest rates to combat higher inflation, which attracts more capital inflows from around the world from investors looking for a lucrative place to put their money.
Historically, gold was the asset that investors turned to during times of high inflation because it held its value, and while investors will often continue to buy gold for its unthreatening haven property in times of extreme market turmoil, in most cases this is not the case. This is because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are bad for gold because they raise the opportunity cost of holding gold compared to interest-bearing assets or putting your money in a deposit account. On the other hand, lower inflation is usually good for gold because it lowers interest rates, making the vivid metal a more viable investment alternative.
