Why inflation is the new variable to watch

Adam Allington Feb 26, 2015
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Why inflation is the new variable to watch

Adam Allington Feb 26, 2015
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Jobs and the labor market have held our national attention for so long, it almost seems kind of strange to now talk about inflation.

The Federal Reserve has two main jobs, one is to maximize employment. The other is to keep inflation at a certain target. Why? Because inflation and growth go hand-in-hand, and the Fed aims for a “Goldilocks” rate of inflation that will ensure wage growth and economic well-being. 

The Fed’s target is 2 percent inflation. And once we hit that point, the Fed will start to raise interest rates, to be sure the economy doesn’t overheat (Goldilocks, remember!).  But we’re nowhere that point, not least because falling fuel prices are holding inflation down. And they may continue to do so. So we can expect interest rates to remain low for a while yet.

What will turn things around? TD Securities economist Millan Mulraine says keep an eye on wages. They are trending higher, and should ultimately push inflation back in the right, upwards, direction.

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