When we make reference to year-over-year core inflation – that is, inflation without food and energy – it’s only because we believe that core inflation is a helpful predictor of headline inflation over the next three or four years. It is important, I think, to understand why there is no longer an intrinsic connection between the size of the Fed’s balance sheet and inflation.
In the past three years, the Fed has bought over $ trillion of securities issued or backed by the government. The Fed has funded that purchase by tripling the amount of deposits held by banks with the Fed – what are called bank reserves. The standard reasoning is that this kind of reserve creation is inflationary.