The problem for the Fed in terms of moving as quickly as June to extend quantitative easing is that we are going through a period of higher measured inflation rates. This is no longer December 2008 or August 2010 when deflation was a legitimate threat. That is clearly not the case now, at least as far as the Producer Price Index (PPI) and Consumer Price Index (CPI) statistics are concerned. We don’t expect to see a real inflation cycle taking hold until we either close the massive resource gap in the jobs market or until the next secular credit expansion takes hold, and that can be years away. But the surge in commodity prices — the Fed actually played a minor role here — is showing through definitively in the price statistics and several measures of inflation expectations are ticking up. Since the central bank has so often in the past talked about these measures it would seem inconsistent to ignore them in a bid to support asset prices once again...
We don’t expect the inflation bulge to last for long, but certainly long enough to push the Fed to the sidelines once QE2 runs its course. Again, not just the actual inflation data, but the 5-year breakeven levels from the TIPS market have risen more than 30 basis points since the end of 2010, and the University of Michigan 5-to- 10-year median inflation expectation index has broken out visibly to the upside, from 2.8% in December, to 2.9% in January and February, to 3.2% in March — the highest since August 2008.
In fact, the Fed tried to generate inflation but it got the wrong kind of inflation. It didn’t get wage inflation, which helps people in their spending plans. It didn’t generate real estate inflation even if it did ignite the stock market for a few months in any event. Instead, what we have are soaring prices for the items that are very difficult to substitute away from like energy and food — that’s the inflation we have.
---ibid [my italics]