Rebound in core inflation makes Fed's life difficult

The marked rebound in the rate of core inflation since late last year is one of the key reasons why Fed officials are more wary of implementing further quantitative easing now. Some of the recent acceleration in core inflation has been due to temporary factors, particularly the rapid surge in motor vehicle prices following the Japan-related disruptions to supply. But there is more to it than that. In a relatively closed service-based economy like the US, labour is by far the biggest cost of production. Accordingly, the turnaround in unit labour costs is a key factor explaining why core inflation has rebounded so strongly.