The Fed, we’ve just learned, is considerably less optimistic about the path of core inflation than they were just a few months ago.
The new SEP found officials suggesting we might look up later this year and discover that underlying price growth is still hanging around 4%.
Of course, you didn’t need a panel of economists chaired by a lawyer to tell you that. You could just look at the path of core inflation or, if you don’t like charts, you might go out to lunch or get a haircut or pay for some other service. Odds are, you’ll pay more for it than you did this time last year. Probably not enough more to break the bank, but enough more to be noticeable and annoying, and if you’re a middle-income family, too many such experiences could add up to a mild budget squeeze.
I hesitate to employ the visual shown below. It’s embarrassing, frankly. For the people who control the money, not for me. It shows the Fed trying to predict where core price growth will end up in 2023.
In early 2021, at the onset of the developed world’s post-pandemic inflation crisis, officials expected we’d be looking at 2% core PCE right now. But here we are, midway through 2023, and we’re nowhere in the ballpark of price stability, although I suppose that depends on your definition of “stability.” In many respects, something that’s stubborn and “sticky” is stable, so maybe we do have core price “stability” after all.
Jokes aside, I should emphasize that the simple figure above is evidence to support the contention that the Fed likely never had any kind of control over inflation. The well-documented structural disinflationary enablers that accompanied globalization and defined the Great Moderation tamped down price growth for goods (and some other things) in the developed world, which had knock-on effects for other kinds of prices. It was price stability through various Faustian bargains (e.g., trading good jobs for cheap goods). Importantly, it was only price stability if you didn’t count healthcare, the cost of a good education and so on. Bottom line: Central banks had the illusion of control. That’s all. And even there, prices for key services were spiraling higher regardless.
That was no Eden, and maybe we shouldn’t even want to go back there. But we do need some sort of price stability, and going forward, it’s important to note that for all the financial media focus on core measures, there are very real risks even to headline inflation. I present the figure below with the usual caveat: I haven’t done the math. I assume I don’t need to, it’s from BofA.
The message is as familiar as it is simple: It’s not a foregone conclusion that headline price growth is going to keep falling. Note that if anything goes wrong — say, a series of events conspires to create a run of 0.3% MoM increases — the YoY headline CPI prints could easily inflect for the worse.
Those prints (the headline readings) are what the nation’s largest general interest newspapers focus on. And, as Jerome Powell was polite enough to point out during the June 2022 post-FOMC press conference, everyday people “don’t even know what ‘core’ is.” His point was simple: Regular people can’t “look through” the cost of food and energy. Those are necessities. Even if core inflation were low and stable, it’d be small comfort to people who need to drive, keep warm in the winter, keep cool in the summer and eat, which is to say everyone.
For now, the headline gauge is less than half what it was at the peak, and the Fed is laser-focused on core and so-called “super-core.” “Core inflation is just not moving and that’s going to require probably some more tightening to try to get that going down,” Chris Waller said Friday, in some of the first remarks from Fed officials coming out of the June policy meeting.
It seems to me there’s too much pedantic focus among analysts, economists and policymakers on the factors and dynamics that may (or may not) conspire to produce the statistical appearance of pseudo-price stability, as opposed to a bigger-picture, more holistic focus on the real problem. Every time you look up, someone’s debating whether this month’s decline in wholesale used car prices means we can look through last month’s elevated core CPI print. Or someone else is patiently explaining that because some Sally somewhere was able to trade a $1,900 lease for an $1,825 lease at a comparable apartment complex, we may be on the brink of seeing shelter inflation break lower.
That’s all fine and good, but it feels almost like goal-seeking — as if we’re not really concerned about price stability, but rather with being able to say we have price stability based on tortured statistics.
Oh, wait. I forgot. That’s how it’s always been with measuring inflation in America. Carry on, then.
I don’t believe an actual 2 handle for inflation is anywhere in the cards for a while yet but I have started seeing more and more stuff on sale. I’m a red meat fan (find what you love and let it kill you, some say) and I was able to buy two nice 10 oz KC Angus strips for $6 each in the last couple weeks. Early this week the price on my favorite Angus Filet Mignon was priced at $11.29, not on sale. That’s down by 60% since last year and, yes, it was delicious. Cars are starting to offer deals, although I saw a new Lucid bargain priced? with a $1650 lease payment. My catalogs have sales everywhere and all that inventory still needs to be soaked up.
Thanks for your always useful insights, but especially this one.
Certainly an unpleasant truth about disinflationary enablers through globalization. It was indeed a Faustian bargain to trade good jobs for goods. And you make an excellent point about the pricing of food and energy, to which I would add the pricing of living spaces.
It’s a funny thing about being a human type of critter: It’s easier to look backward and experience errors and failures multiple times than to have the presence of mind to foresee the future. Will we learn from this exercise? Doubt it.
I always hoped (and I believe Kissinger did as well) that China would consider a more open style of government. So far, not true.
Whither to from here? What are the evolving opportunities for manufacturing? Will the Fed be able to address the inflation that seems to be unmanageable in the US economy? I imagine some manufacturing will return to the US. I just wonder if we’ll be able to pay our own people enough to enable them to manage the costs of living here, such as buying a home at a reasonable cost and feeding and educating one’s children.
Thanks once again, Walt, for sharing your perspectives.
I’ve come across a factoid that makes a nice counterpoint to your reply; it illustrates one tiny example of how competition can evolve in response to inflation and deglobalization. In May, reports came out showing that the top downloaded shopping app in the US was not Amazon, Walmart, Target, etc., but Temu. Discerning shoppers (i.e., those who aren’t interested in $14 shoes) have likely never heard of Temu, but there it was: top of the list in the US… and the UK, Germany, France, Spain, Italy, and 8 other countries. Temu is the international low-price ecommerce division of China’s PDD. Walt has frequently commented on the plight of workers unable to keep up with inflation, and it’s no surprise that low-cost supply is finding that demand. US workers who need “stuff” will rejoice at buying from someone who can make Walmart look like they’re price gouging.
A couple things struck me about this. Globalization used to be viewed simplistically as US retail seeking “the China price”. Now we’ve assumed deglobalization is some act of volition by US companies to restructure their supply chains, optimally or not. But the China price is still out there. What happens when globalization comes back the other way, from manufacturer direct to consumer, whether US companies like it or not? So disinflationary “enablers” simply become “factors” that have to be competitively reckoned with and which may prove as sticky as we think inflation is today. Temu (and Shein, and likely others) are still just toddlers. But when one can undercut “everyday low prices”… by 30% … I suspect we’ll be hearing more about the US growth of these companies and the attendant economic implications.
The idea that globalization can involuntarily force disinflation by churning the domestic scene is hardly new. My first car was a 1982 Honda Civic and I bought it despite the “Japan on the rise” hysteria back then. We were all fed up with inflation and just needed alternatives.
My own pair of $14 shoes from Temu will show up in a few days. It will be interesting to see how that experiment turns out.
Reported CPI understates the true increase in living expenses (call that “actual inflation”).
The CPI methodology has been changed over the decades; for probably-obvious reasons, this has been in ways that lower CPI. Substitution and hedonic adjustments are two examples. CPI calculated as it was in Vockler’s time would probably be several points higher. This link goes into detail, some of which I would use as issue-spotting rather than given-truth. http://www.shadowstats.com/alternate_data/inflation-charts
OER, the single largest CPI component, is a wooly concept fuzzily implemented. I suppose the logic is that people don’t “need” to buy their shelter so we’ll substitute the guessed cost to rent it, but people don’t “need” to eat meat or buy new cars or take vacations. Inflation should measures the cost of how people do live, not how some theorist thinks they should live. The correct measure is not what homeowners could rent their houses for, but what it costs them to buy the house. OER does track directionally with house prices, but with much lower amplitude. During house price bubbles (like now), CPI far understates true inflation.
I love your “wooly concept fuzzily implemented” phrase. I wrote this down to remember. BTW – I searched it in Google and didn’t get any hits. Cheers!
FWIW, experts say that CPI far understated inflation (due to housing costs) last year but is presently overstating it…
What would you propose, Walt?
Inflation seems worth measuring and thus we have to use statistics, which are always going to be subject to nitpicking expert debate.
Besides which, you know why food and energy are excluded. They’re usually volatile, up and down and, even when they’re going one way (like last year), they’re not really under the control of the US, either the government or the Fed. And, frankly, the US, with its domestic oil production, is better placed than most.