THE U.S. CONSUMER PRICES INDEX…IS WHAT IT IS… AND AIN’T WHAT IT AIN’T!
‘…and that’s not nuthin!’
The recent reading of the U.S. CPI Core rate is at +3.2% year on year. This rate peaked at +6.6% in September 2022, so it has fallen by more than half in the last two years. Most of the decline was during the first year after the top, but since last August the rate is down 1.1% ‘…and that’s not nuthin’. Of course, the Fed is interested in getting the inflation rate back down to their preferred target at 2.0% and 3.2% is higher than that (Graph 1).
Graph 1
Even in the best case scenario, there is no expectation that an inflation rate will go to its assigned target and stay there like an obedient pet. The CPI Core is a good case in point. In the last decade or two the rate has been above two percent as often as it has been below that level. However, it is notable that in the ten and twenty year periods ending in February 2020, prior to the pandemic volatility, the average rate for the CPI Core has been +1.9% and +2.0%, respectively. Obviously, the last three years have thrown the longer run averages out of whack. As of August this year, the 10 Year Moving Average for this measure is +2.9% and the 20 Year is at +2.4%. Not there yet… but the longer run can take a long time (Graph 2).
Source: Bloomberg Finance L.P. Graph 2
Now…just stop yourself right there! There’s nothing that says the Fed wants the CPI or CPI Core rates at 2.0%. According to the Fed’s Statement on Longer-Run Goals and Monetary Policy Strategy, “The Committee reaffirms its judgment that inflation at the rate of 2 percent as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve’s statutory mandate.” So…it is the PCE Deflator that is the inflation measure that is the key rate that the Fed is targeting…not the CPI!
Source: Bloomberg Finance L.P.
22 | ADMISI - The Ghost In The Machine | Q4 Edition 2024
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