Philadelphia Federal Reserve Bank President Charles Plosser said Friday that while PCE data shows inflation is moving in the right direction, he worries about inflation two to three years down the road.
“I’ve been saying for some time we’re going to drift back up towards that 2% goal,” Plosser said in a CNBC interview from Stanford University’s Hoover Institute conference.
“This is a sign we are moving back in the right direction,” he said of April’s 1.6% year-over-year gain in the Personal Consumption Expenditure index released Friday morning.
Core PCE prices, which excluded food and energy, were up 0.2% for the month and up 1.4% over a year ago, which was the biggest year-over-year rise since March 2013.
But “I think you’ve got to look at the forecast for inflation,” Plosser said. He previously has warned about the inflationary impacts of bank reserves when lending begins to pick up.
“We can’t control inflation precisely for just a few months or a few quarters,” Plosser said. “We have to continue to focus on what we think the long term forecast for inflation is going to be, as well as for the economy.”
But he cautioned against reading to much into a single month’s numbers, saying the Fed is looking at a long-term horizon. “I think it’s a danger to monetary policy makers to get too wrapped up in the month-to-month numbers, unless they really do believe it’s going to be a long-term trend.”
Since monetary policy works on a lag, he said he worries about getting behind the curve, saying “we don’t know when (inflation is) going to show up. The impact is not just going to be next quarter, but what’s going to happen two or three years from now.”
As for the economy, Plosser said “the first quarter is going to make a dent, the weather is going to make a dent,” referring to the 1% drop in GDP growth in the first three months of the year.
But he said he still sees 3% growth for the rest of the year, while the unemployment rate, which was 6.3% in April, “will continue to move down,” and “there’s a possibility we could be below 6% at the end of the year.”