by Steve Roth
Initially Posted at Wealth Economics (June 2023)
Current headline inflation prints are beneath the Fed’s goal, and falling. That information is a strong device for controlling expectations, however the Fed’s not utilizing it.
1.5%. That’s the most recent headline inflation price within the U.S. per the Might CPI launch, and in addition based on a three-month common of three completely different inflation indexes that use considerably completely different information, baskets, and weightings.
It looks like this low inflation ought to do a lot to tame folks’s inflation expectations: the Fed’s bugbear. They need to be shouting this from the rooftops, proper?
By this multi-index quarterly measure, which smooths out risky, random, and “head-fake” outcomes with out resorting to the distorting extremes of twelve-month year-over-year averaging or pessimistic slices of the info, the information is superb certainly. The measure’s been declining, with one small uptick, for six months. (Following the energy-price-driven cliff-dive in July.) It’s been at or beneath 4% for 9 months. In one other key benchmark, the fed funds price has been (more and more) above the inflation price for six months.
However what does the press report? Right here from the June 13 New York Instances article, headlined “May Inflation Report.” Washington Submit delivers the very same graph.
This isn’t Might inflation. It’s (silently) reporting year-over-year (common) inflation for the twelve months June ’22 by way of Might ’23.1 The 14.3% June ’22 print, as an example skews this “May” inflation price unrealistically upward. The actual “headline news” is that month-to-month inflation is printing at pre-pandemic ranges, effectively beneath the Fed’s 2% goal.
The Instances doesn’t simply bury the lede; they don’t even report it within the article. (The Submit does present a chart of month-to-month modifications, although not annualized and with out dialogue.) They usually’re not alone. Ask Google, as an example: “what was the CPI inflation rate for May 2023?”
Whither goes the Fed…
The Fed constantly does likewise. In his statements following FOMC price selections, as an example, Chairman Powell by no means mentions latest months’ modifications — solely yr over yr. This week’s June 14 assertion:
Inflation stays effectively above our longer-run 2 % objective. Over the 12 months ending in April, complete PCE costs rose 4.4 %; excluding the risky meals and power classes, core PCE costs rose 4.7 %. In Might, the 12-month change within the Shopper Worth Index got here in at 4.0 %, and the change within the core CPI was 5.3 %. Inflation has moderated considerably for the reason that center of final yr.
“Somewhat”? Final June, the PCE and CPI month-to-month prints had been at 11.9% and 14.3% respectively. The Fed’s and Fed-watchers’ “preferred” and more-pessimistic “core” inflation, and different more and more slender measures, simply amplifies the tendency embodied in YoY averaging when inflation’s falling. There’s all the time some measure that appears extra worrying, whilst the excellent news rolls in.
A cynical view would possibly recommend that the Fed governors are performing out a Seventies/80s childhood trauma, though right this moment’s circumstances — together with (un)employment, bond yields/costs, and fairness costs — are vastly completely different. PTSD as financial coverage, with the press blithely following alongside?
To some larger or lesser extent, folks’s inflation expectations are all the time going to be powerfully affected by present (latest) inflation charges. If controlling expectations to stop the dreaded “wage-price-spiral” is a key objective for the Fed, aren’t they leaving a strong coverage device mendacity on the bottom, mouldering? It’s a thriller.
As all the time, ideas and recommendations from my mild readers are a lot appreciated.
1 Since this display screen seize, the Instances has up to date the advantageous print on the backside, including “Year-over-year change in the Consumer Price Index.” WaPo hasn’t.
