Inflation is progressing faster than expected
The continued underestimation of inflation by professional economists during the Biden administration will one day become a major topic for economic historians to study.
The Bureau of Economic Analysis released its economic growth forecast for March on Friday. Personal Consumption Expenditures (PCE) Price Index. Both the composite index and the core index rose 0.3% in the month, or an annualized increase of 3.9%. Over the 12-month period, headline inflation rose 2.7% and core inflation rose 2.8%.
After yesterday’s gross domestic product report showed that Quarterly inflation rate exceeded expectations, the big question was whether this was due to a sharp increase in March or an upward revision to the previous month. Much of his monthly PCE inflation rate can be predicted based on comparable measures of the Consumer Price Index and Producer Price Index released several weeks in advance, so the upside surprise could be rooted in a correction. The best interpretation is high.
That turned out to be correct. The headline PCE forecast for January was revised upward from 0.377% to 0.423%. This is a significant upward revision of 5 basis points, but it is hidden by the fact that both are rounded to the nearest 4%. Similarly, Core index revised upward by 5 basis points From 0.452 to 0.502. February’s numbers have been revised upward slightly.
Displaying monthly numbers in unrounded percentage point decimal units may underestimate the magnitude of the difference. Do a few basis points really make a difference? This information is useful to better understand the difference between preliminary and revised figures, and to see how much inflation is progressing. Annualize monthly numbers.
Monthly Headline PCE Statistics for January Last month’s forecast was for inflation to be at an annual rate of 4.6%.. After Friday’s correction, Currently it is 5.2%. The annualized core figure for the month was 5.6% in January, but it is now 6.2%. The story for core PCE inflation is essentially the same. Monthly inflation rose from his initial forecast of 5.1% per year to 6.2%.
The impact of the revisions becomes even more pronounced when we look back at our initial forecast for PCE inflation in January. Annualized number of months January’s initial report was 4.2%.a full percentage point ahead of the current forecast for January.
The graph below shows the trend of PCE inflation in January, with the blue bar being the original forecast published in late February, the red bar being the first revised value published in late March, and the green bar being the first revised forecast published in late March. Shows the latest revised value.
This is a disturbing trend. At the very least, it’s fair to wonder whether the slight correction seen in February’s data will be subject to further upward revisions, and whether March’s data will follow the same pattern. The fact that the first report underestimated inflation and that even the first revision was insufficient makes it more likely that More recent data is also lower than the actual numbers.
Inflation can fluctuate from month to month, so it’s worth looking at the three-month annualized rate and the trends in inflation it reveals. The first report for January, released in late February, showed three-month PCE headline inflation at an annual rate of 1.8% and core inflation at 1.6%. According to the February report, this percentage rose to 3.4% in headline and 3.5% in core. The three-month annualized value is currently 4.4% for both core and headline.
Super core inflation is too hot
Another way to see how much inflation is running ahead of expectations is to look at the following forecasts. Survey of professional forecasters First quarter PCE inflation rate. The core inflation rate was expected to be 2.5% as of February 2023. This figure remained essentially flat in last year’s survey, rising to 2.6% in August and 2.7% in November. However, in February’s survey, expectations had dropped significantly to 2.1%, falling short of the 3.7% target reported in Thursday’s first-quarter GDP release.
One indicator of inflation that’s really going in the wrong direction for people hoping for rate cuts is what has come to be known as. “Super core inflation”. This is a measure of service inflation that takes away energy and housing. The monthly annualized rate in March was 4.8%, up from 2.2% in the previous month. The annual interest rate for three months has increased from 4.5% to 5.5%.
This measure was originally devised on the idea that shelter inflation was calculated as follows: exaggerate current price increases This is because it does not reflect the recent slowdown in the pace of rent increases. In other words, it was invented to show that the rate of inflation is actually lower than what would be seen in a normal index. Currently, it has been shown that this is not the case. If you think supercore inflation should be your guide, you should be even more worried than the headlines and outdated cores suggest.
View from the Fed
Although it seems like a different era now, The Fed began warning in January that the market was getting ahead of itself. By assuming the Fed was on the brink of cutting rates six or seven times this year. The Fed signaled at its January meeting that it would not cut interest rates in the first quarter of this year because it needed more confidence that inflation was sustainably returning to 2%.
So what was inflation like then? When the Fed met in January, they had the December PCE price index released just days earlier. Three-month annualized PCE increased by 0.5%. Core rose 1.5%. Several analysts and experts had called on the Fed to declare victory over inflation.
Fortunately, the Fed took a cautious and far-sighted approach and looked to a sustained decline in inflation to confirm a downward trend. After all, inflation was back in full force.
So what does this mean for interest rates? Fed officials have seen an all-too-realistic example of the fact that inflation can suddenly and unexpectedly accelerate. If they looked at the three-month annualized inflation rate in January of 0.5% and thought it would be another four or five months before they could cut rates. Perhaps the waiting period is now even longer. And that waiting period likely won’t begin until the three-month average falls below the Fed’s target. In other words, the situation is far from being reduced.
of Market still thinks the Fed could cut rates this year. On Friday, futures markets were suggesting a 58% chance of a September rate cut, a 68% chance of a November rate cut, and an 80% chance of a December rate cut. This outlook still appears to reflect an underestimation of the persistence of inflation and the Fed’s desire for evidence of a sustained move toward 2%.
A better way is The Fed won’t cut rates at all this yearand if inflation remains high, it may decide it needs to start a new cycle of rate hikes sometime next year.
