Inflation is the key for the Fed and they remind us each day with each passing talking Fed head that hits the airwaves.  

Their target is 2% on an annualized basis in the near-term.   We are close, and the Fed is still in a very accommodative stance with the Fed Funds at 1.00-1.25% and a balance sheet at a historic high of $4.5 TRILLION.  

For July, CPI came in .1% headline and excluding food & energy, with the Y/Y rate reaching 1.7% headline and excluding food & energy.  The Fed does't use precision instruments in the conduct of monetary policy; they are blunt tools at best.  With potential inflationary pressures just a military flare up away, or a few more percentage points of weakening of the U.S. dollar and the Fed is going to find itself chasing.  The only saving grace will be if U.S. consumers maintain anchored future inflation expectations such that a short-term temporary boost in inflation won't spook consumers.

Is the Fed behind the curve?  It isn't hard to argue they are.  Behind the curve, to be late in capping inflation pressures such that inflation is very likely to top 2% for an extended period.

The Fed is playing with fire on the inflation front.  Looking at the table below you can see where the pressures are: 

 A quick glance reveals a bunch of 3 handles, and a 7 print.  Energy is an obvious area of concern.  After years of benefiting from sustained relatively low oil prices related to high supply and weak demand which kept inflationary pressures low, the Fed could be facing the opposite at any moment if any one of 4 hot spots in the world boil over; think Syria, Russia/NATO, North Korea, and China and the South China Sea.  

Regular shoppers know the official low inflation rate doesn't match their daily experiences.  The details of the table above shows why.  Headline inflation is low around the world among the major economies, fixed income markets agree, though any reassessment won't take long.