This week we were treated to new inflation data by the BLS. The PPI report and the CPI report both showed dramatic falls in the rate of inflation, driven mainly by lower oil prices. But both reports indicated that inflation in other (e.g. non-oil) types of goods and services is also falling. The picture below illustrates.
By almost any measure of inflation you look at, the rate of inflation seems to have already passed its peak and begun falling. This was, of course, exactly what the Fed hoped to acheive by raising interest rates steadily for the past two years. Economic growth in the US has slowed, and the ability of firms to raise prices has been reduced along with it.
The Fed has also been lucky that oil prices have fallen considerably in recent months, of course. Together, the slowing economy along with lower oil prices have spelled a dramatic change in the inflation picture over the past few months - and may have rendered the Fed's concern about inflation obsolete. Discussion about the Fed raising interest rates further thus seems premature at best, and possibly downright foolish. To me, this picture is one of the best indicators yet that the economy began to soften significantly during 2006.
The real question is this: how slow will the economic slowdown go?