Watch out for the headlines – month-on-month inflation is (again) down, even if it’s up year-over-year. Fine-tuned and chained CPI price inflation also declined, while sticky price inflation was flat. However, the headline and core CPI did rise unexpectedly (m/m, 10bps above Bloomberg consensus).
First, recall that the 12-month inflation rate (aka the y/y rate) is largely backward looking. Month-on-month indicators are more reflective of current conditions, albeit a bit more noisy.
figure 1: CPI month-on-month inflation, annualized (blue), 12-month or year-over-year inflation (pink), in decimal form (ie 0.05 for 5%). The NBER uses shades of grey to define the peak and trough dates of the recession. Source: BLS, NBER, and author’s calculations.
For core inflation, the story is slightly different, when the month/month stays high, the year/year rises.
figure 2: CPI core month-on-month inflation, annualized (blue), 12-month or year-over-year inflation (pink), in decimal form (ie 0.05 for 5%). The NBER uses shades of grey to define the peak and trough dates of the recession. Source: BLS, NBER, and author’s calculations.
What do other measures of headline inflation look like on a morning/month basis?
image 3: CPI month-on-month inflation (blue), chained CPI (brown), 16% adjusted CPI inflation (red), sticky price CPI inflation (green), PCE deflator (black), all in decimal form (i.e. , 0.05 means 5%). Chained CPI (brown) seasonally adjusted using arithmetic bias. NBER-defined recession dates (peaks and valleys) shades of gray. Source: BLS, BEA, Atlanta Fed, NBER, and author’s calculations.
Chained CPI monthly/monthly inflation fell, as did the trimmed mean, while sticky price inflation was flat. A lower average inflation rate means the decline is broad and not driven by outliers. Flat sticky price inflation means that infrequently changing prices continue to rise at the same pace as in November.
Turning to the core indicators (i.e., excluding food and energy prices), we see the graph below (note that the vertical scale has the same range as in Figure 3 to better illustrate how the core indicators exhibit less variability ).
Figure 4: Month-on-month CPI core inflation (blue), chained CPI core (brown), sticky price CPI core inflation (green), personal consumption expenditures core deflator (black), all in decimal form (ie 0.05 means 5%) . Chained CPI (brown) seasonally adjusted using arithmetic bias. NBER-defined recession dates (peaks and valleys) shades of gray. Source: BLS, BEA, Atlanta Fed, NBER, and author’s calculations.
Beware of “logging”. On a monthly basis, inflation has been high for the past 20 years.
Figure 5: CPI month-on-month inflation rate, annualized (blue), in decimal form (ie 0.05 means 5%). The NBER uses shades of grey to define the peak and trough dates of the recession. Source: BLS, NBER, and author’s calculations.
So on a monthly basis, inflation is now nowhere near record highs.
Going forward, housing costs may have a measurable impact. China Eastern Air Show Contribution of owner-occupancy equivalent rent and primary residence rent to overall CPI, y/y.
Despite the upside surprise, the 5-year inflation breakeven (unadjusted) fell 5 basis points.
