Core PCE inflation reached consensus at 0.2% m/m. Are we in a new inflation regime?
figure 1: Month-on-month annualized inflation rates for CPI (blue bold), core CPI (tan), PCE deflator (bold sky blue), and core PCE deflator (light green). Dates of peak-to-trough recessions as defined by NBER are shaded in gray. Sources: BLS, BEA via FRED, NBER and author’s calculations.
Headline CPI and PCE deflator month-on-month inflation appear to be falling. The same goes for core CPI and PCE deflators. For a more formal assessment, I estimate a simple Markovian transition model (two regimes, different variances) for the period 1960-2022.
This produces the following state probabilities (filtered, smoothed):
figure 2: Estimated state probabilities (sky blue). Dates of peak-to-trough recessions as defined by NBER are shaded in gray. Source: Author’s calculations.
As of November 2022, the probability of being in a state of high inflation is 15%.
As the decline in core inflation is less pronounced, the probability of high inflation is estimated at 80%.
