In an earlier post regarding the excellent Q3 '03 economic growth rate, I mentioned that the Personal Consumption Expenditures (PCE) price index was growing quickly. What the PCE price index does is measure inflation for consumer purchases, which represent 70% of all economic activity in the United States. Central bankers watch this number closely and target about 2% annual inflation. If inflation goes much above 2%, then the central bankers will make money more expensive by raising interest rates.
Raising rates is normally necessary almost immediately after an economy begins to pick up speed, like has happened this year. But Alan Greenspan and the Federal Reserve have made it clear that they will not likely raise interest rates for a while. Why are they saying this? Consider the following chart, which plots the quarter over quarter year ago PCE price index growth.
You can see that inflation is staying very close to 2%. Indeed, we are in a better position during this recovery with regard to inflation than in any other in the last 40 years. Of course, this luxury won't last forever. Inflation picked up speed in the third quarter from the previous quarter. Even so, it was relatively tame for such a high growth quarter. 1.93%.