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I Was on the Inside

MELBOURNE, Fla. -- Follow me.

No need to argue. Or raise objections. Just keep an open mind. And consider the argument. Especially from the central-bank point of view in the wake of this afternoon's 50 basis-point

interest rate hike.

The price measures have bottomed. The

consumer price indices

show it.

Three key CPIs -- the core (excluding food and energy) index, the all-items-less-energy index, and the services index -- all put in a trough last summer. They're all growing at faster rates now than they were then. Marginally faster? Yup. Indeed. But faster nonetheless.

Two of them showed deceleration between March and April. Is that enough to suggest that they've peaked? That the price measures have topped out?

No. Although that might well turn out to be the case -- six months from now we might well look back and say "Yup! That was indeed the top!" -- there's currently too much other-side evidence out there to lock into that thinking now. First, the better price indicators -- things like the gross domestic purchases price index, the personal consumption expenditure price index, and the FIG (which we've

referenced here before) -- are still accelerating. Second, your correspondent argues that even the CPI numbers themselves do not show deceleration in any real sense: An unusually big March number just messed things up a bit. Throw that out (bet you thought you'd never hear me suggesting that), stitch together February and April (both perfectly normal as far as monthly price increases go), and the uptrend remains intact (see table above).

Third, think about everything we know. From money growth to labor-market tightness to wage acceleration to demand to pipeline prices to things that used to help but now hurt (import prices and medical care and benefit costs), it's just too hard to believe that one new CPI data point means that we can worry a little less about a potential price problem. Or that central bankers will.

OK then. The price measures have not peaked. Now what?

Now consider the lagging nature of the things we're talking about: The price measures and monetary policy. The CPI, for example, is the laggiest of the lagging indicators out there. The April number tells us not what went on in April, but rather what went on months ago; likewise, we'll know what's going on right now only when "new" CPI numbers are released months from now.

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So, as a central banker, how do you respond?

You hike now -- by more than you've been hiking. Why? Cause you reckon you'll find out later that the price pressure that was surfacing before is most likely intensifying more now. And -- and here's where the second part of the lag thing comes in -- you know that whatever you do now (in terms of hikes) will take months to begin biting. And that the pressure will have intensified further still by the time it does.

Think about the remarkable progress this central bank has made since the current expansion began more than nine years ago. It's driven down the rate of core price increase by three full percentage points. It engineered (against violent criticism at the time) a damn good landing in 1994. It's built up more credibility than it could ever have reasonably hoped for.

Why in the world would it want to risk losing such very hard-won gains?

Gradualism never implied a lack of resolve to keep disinflation on track.

This quote from the

Salomon Smith Barney

economists raises an even better question: Why in the world would central bankers want to quit now? Why in the world would they be content to let the core price measures creep back up? Even to 3%? Why in the world wouldn't they keep working hard to keep them on the stable 2-whatever track they're on now?

'Cause such work might keep

Herr Tennessee from getting elected? 'Cause it stands a chance of throwing us into recession? 'Cause they're afraid of stocks? 'Cause they're tired of hearing

Kudlow accuse them of trying to crush prosperity?

C'mon. Only that last one has any real merit -- and if enough people just ignore him, as they should, eventually he'll go away.

Anyway. That's the way I'm lookin' at things. 'Cause that's what makes sense to me ... in a boy-tryin-hard-to-be-a-man kinda way.

And hey. You are, as always, free to disagree.