It is frequently said that the Federal Reserve steers by looking in the rearview mirror, basing monetary policy decisions on where the economy was in the past, rather than where it is today, or where it is headed. The reason is simple: the Fed relies heavily on measures that summarize the preceding 12 months. Those measures can be slow to reflect a sharp change in the current inflation run rate.
Consider the Consumer Price Index, which purports to measure “inflation” by tracking changes in consumer prices. The July CPI came in at 3.4%, slightly below the June figure of 3.5% — and still far above the Fed’s 2% policy target.
