Implications: Inflation is still in a long-term rising trend, but that process is going to be gradual, with many stops and starts along the way. Booming energy production is a key reason why headline inflation hasn't moved up more quickly. Producer energy prices fell 1.5% in August and are up only 0.2% from a year ago, a testament to fracking and horizontal drilling. Largely as a result, producer prices were unchanged in August and are up a modest 1.8% from a year ago. Still, through the first eight months of 2014, producer prices are up at a 2% annual rate, well above the 1.1% rate over the same period in 2013. The Federal Reserve should take note that rising inflation is more apparent in the services sector, where prices are up at a 2.6% annual rate in the past three months versus a 1.9% gain in the past year. Prices further back in the production pipeline (intermediate demand) do not yet confirm a continued acceleration in inflation. Prices for intermediate processed goods are up at a 1% annual rate in the past three months, slightly below the 1.2% gain over the past year. Prices for unprocessed goods saw a sharp 3.3% decline in August and are down at a 24.7% annual rate in the past three months. But intermediate demand prices are highly volatile and we expect prices to move higher over the coming months. Taken as a whole, the trend in producer price inflation continues to hover around 2%, suggesting the Fed should continue on the path of ending quantitative easing by the end of October. The problems that ail the economy are fiscal and regulatory in nature; continuing to add more excess reserves to the banking system is not going to boost economic growth. Loose monetary policy will eventually gain traction.
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