A key part of any forecast is inflation. In 2011, we were reminded that inflation can rise despite elevated unemployment. In 2010, the inflation rate was 1.4 percent.3 In the first 11 months of 2011, inflation has averaged 2.5 percent at an annual rate. Obviously the run-up in energy and food prices earlier this year played a big role in this increase. But the pickup in inflation last year was broad based. Core inflation ― which strips out food and energy prices ― was 0.9 percent in 2010, but averaged 1.7 percent in 2011 through November. This higher inflation rate in 2011, despite unemployment averaging 9 percent, undercuts the hoary notion that "slack" in the labor market can be counted on to keep inflation contained. This lesson is of course not new; we learned this all too well during the 1970s.
Despite last year's run-up, I believe the inflation outlook is reasonably good right now. Recent price trends have been quite favorable, and indeed, headline inflation has been quite low in recent months. The most likely outcome this year, in my view, is for overall inflation to average close to 2 percent. A rate noticeably below 2 percent is possible, particularly if global growth should soften enough to further ease pressures on commodity prices. But I still view the risks to inflation as tilted to the upside. A comparison of 2011 with the experience of 2004 through 2007, for example, suggests that an upswing in inflation at this stage of the business cycle is typically long-lasting.Awful. Remember Godfather pizzaman Herbert Cain was a Fed vice president and Missouri has 2 Fed banks.