“The Output Gap Appears Closed”

The Federal Reserve Board released an updated version of its large-scale model on the U.S. economy that may hold clues into why policy makers pivoted at their meeting earlier this week toward a December interest-rate increase, reports Bloomberg.

The revised inputs and calculations suggest the economy will use up resource slack by the first quarter of 2016, according to an analysis by Barclays Plc, and that also indicates Fed staff lowered their near-term estimate for how fast the economy can grow without producing inflation -- a concept known as potential growth.

“The output gap appears closed,” said Michael Gapen, chief U.S. economist at Barclays’s investment-banking unit in New York. “This means further progress would lead to resource scarcity and potential upward pressure on inflation in the medium term.”

It's a bit about an output gap, but it's more about changes in the demand to hold cash balances and about Fed money printing but the price inflation pressure is building. I have been accelerating my warnings in the EPJ Daily Alert that price inflation in 2016 will surprise most. I expect 3% first, as measured by government price indexes, followed by a jump to 5%.

 -RW