Dogmatic denial of inflation
The High Hat Church has ruled against claims that the specter of inflation is once again haunting the U.S. economy.
It’s just an illusion. One month’s worth of data. Only a fool would mistake January’s abnormal price rise for economic trends.
President of the Federal Reserve Bank of Chicago Austan Goolsby On Wednesday, he donned the Immaculate Mouth’s Mantel of the Mouth of Destruction, giving believers catechist-like reassurance that there was really nothing to worry about. Inflation remains ‘on track’.
Bloomberg reports:
The Chicago Fed president, who will not vote on policy decisions this year, stressed that it is important not to judge inflation trends from one-month numbers and that the Fed’s 2% target is based on the Consumer Expenditures Price Index, not the CPI.
He noted that the two metrics could differ “somewhat significantly.”
“I do not support waiting until 12-month inflation has already reached 2% to start cutting rates,” Goolsby said, adding that the central bank’s current policy stance is “quite restrictive.”
But for those of us who operate markets without the abiding belief that inflation is heading toward 2%, the latest consumer price index The (CPI) report looks less like an aberration and more like a continuation of a months-long course toward higher inflation.
We noticed in December that the consumer price index did not show the sequential deceleration it had in the previous two months. The pace of increase in CPI accelerates in November The rate rose to 0.16% from 0.08% the previous month. Although still at a slow pace, it was a warning sign that inflation is no longer slowing. In December, it rose to 0.23%. Tuesday’s data showed CPI rose 0.3% last month.
As I explained a month ago, it looked like this to us. “Disinflation is over”
The diagram below illustrates this point perfectly. January was not an aberration, it was the third month. Linear trend towards higher inflation.
The upward trend in core inflation has continued since last summer. The numbers are skyrocketing. However, as the graph shows, the trend is clear.
The median is the message
For those willing to dig deeper into the data and break away from Wall Street and Fed orthodoxy, there is an even longer set of data that shows disinflation has come to an end.Cleveland Fed actions Median inflation and trimmed average inflation rate 16% For more than six months, warning signs of the risk of rising inflation have been flashing.
For readers who missed it, here’s our analysis for May.
The measures we recommend are: underlying inflationThis is considered to indicate the direction of inflation in the near future. Cleveland Fed Median CPI 16% is the trimmed average CPI metric. The median CPI rose in April by 0.4%, exactly the same as in March. The congruence of median CPI, core CPI, and composite CPI suggests that inflation is no longer driven by outliers but is converging to a central trend and is likely to persist at this high level. doing.
Over the past 12 months, the median CPI has increased by 7%. This has remained in the 7% to 7.2% range since December, when the median CPI was also 7%. In other words, there are no signs of fundamental progress. And the fact that the median is above headline and core suggests that the underlying pressures remain strong. In other words, Inflation risks remain on the upside.
In July, when the headline CPI was up just 3% year-on-year and 0.2% quarter-on-quarter, we were warned that ominous sounds were still rumbling below.
But more troubling than core or headline inflation is resistance to underlying inflation. Median CPI remains unchanged at 0.4% According to the Cleveland Fed, interest rates remained the same for three consecutive months this month. The trimmed average CPI calculated by the Cleveland Fed was 16%, exactly the same as last month at 0.2%.
This suggests that Inflation is unlikely to fall further significantly In the coming months.
In September, we again noted problems with the median and trimmed CPI values.
Measures of underlying inflation show that price pressures actually increased in August. Median CPI rose to 0.3% for the same month, up from 0.2%, according to the Cleveland Fed. The 16 percent trimming average was similar, increasing from 0.2 percent to 0.3 percent.
We don’t quote ourselves simply because it’s fun to check the accuracy of past predictions. We’re having fun with it, but this time we’re making an important point. Inflation data does not show the economy heading towards 2%. Anyone with insight can tell you that inflation data is not just a cloud on the horizon, but a storm on the horizon.
The following graph of annualized monthly changes in median GDP illustrates this well. Median inflation bottomed out over the summer, then returned to high levels. It remained range-bound for several months, but broke out further in January.
Ironically, both the Core CPI graph and the Median CPI graph suggest that disinflation is over. This was around the time the Fed decided there was no longer a need to raise interest rates. to bring down inflation.
PCE inflation is also on the rise
Mr. Goolsby raised the point that the Fed is targeting a policy rate of 2%. personal consumption expenditure (PCE) inflation index rather than CPI. However, this number rose in December and is likely to rise further in January’s statistics, which will be released later this month.
“It is important to remember that the Fed targets PCE inflation, not CPI. Therefore, it is the read-through of PCE that is important for monetary policy.Based on today’s CPI numbers, January’s core PCE will also be We estimate that it could accelerate from 0.17% month-on-month to 0.30% month-on-month.” american bankanalysts wrote in a recent client note.
Next month’s report is unlikely to provide any relief. According to the Cleveland Fed’s Inflation Nowcast, headline CPI rose 0.4% and core CPI rose 0.3% for the month.
Joe LaVogna In a note to clients on Wednesday, the CEO of SMBC Nikko Securities pointed out recent developments and said they should expect an upside surprise in the next CPI report.
Inflation rates tend to be highest in January and February and then slow sharply.. This pattern should still hold, but as you can see below, the gains in January and February are larger compared to the rest of the period. Result is? This “residual seasonality” increases the likelihood that core inflation will rise unexpectedly again next month. [emphasis in the original]
Those who sing the “High Dove” hymn seem to be fascinated by things like: The siren song of temporary disinflation.In other words Ben Affleck in The Dunkings: Ignore inflation at your peril.
There is growing evidence that is as solid and undeniable as the ground beneath our feet. Inflation is real and it’s time to pay attention.
