<< Read More: Inflation Is Back, Part 6: More People Now Expect Higher Prices

<< Read More: Inflation Is Back, Part 5: “The Cost To Run A Restaurant In New York City Is Unbearable”

<< Read More: Inflation Is Back, Part 4: Maybe The Phillips Curve Was “Just Resting”

<< Read More: Inflation Is Back, Part 3: Home Prices Jump Again And “$3 Gas Is Coming”

<< Read More: Inflation Is Back, Part 2: Now It’s Trucks And Teens

<< Read More: Inflation Is Back, Part 1: Does This Mean Spiking Interest Rates?

Monthly economic readings tend to be full of noise and are therefore unreliable. So it’s best to save the excited assertions for established trends.

The US Consumer Price Index appears to have reached that point:

(Click on image to enlarge)

As most readers probably know, the CPI is widely believed to understate the true rate of inflation because of statistical tricks like hedonic adjustment and substitution. So when this index starts rising you know the real action is even more extreme.

The past 12-month increase was 2.8%, which is the highest in six years and continues a general uptrend that began in 2015. What’s moving it? Oil, which controls the price of gasoline among many other things, is up big in the past year:

(Click on image to enlarge)

The cost of renting an apartment or house is also way up, which isn’t a surprise given that home prices are now back at 2006 bubble levels:

(Click on image to enlarge)

The Fed’s Dilemma
The Fed is widely expected to raise short term interest rates again this week, but after that it gets murky. With consumer, government and corporate debt, stock prices and home prices all at record-high levels – and the near-death experience of the 2008 housing/derivatives bust still reasonably fresh in economists’ minds – it’s pretty well understood that raising the cost of money beyond a certain point could lead to catastrophe. See The Number That Ends This Cycle.

On the other hand, letting inflation run beyond 3% on a sustained basis risks leading everyone to extrapolate a rapidly depreciating dollar into the indefinite future and act accordingly. 

This dilemma isn’t unique to this Fed, or this cycle or this country. All mismanaged economies arrive at this point eventually, where the choices narrow to just two, neither of which will prevent an epic bust.