Jerome Powell is an average sort of guy.
Don’t get us wrong. We’re not accusing the chairman of the Federal Reserve of being mediocre. That’s the kind of judgment best left to history or its Author.
What we mean is that when Powell looks at economic data, his instinct is not to look at month-to-month changes but the average of the last few months. There’s good reasons to do this. It smooths out the volatility that afflicts a lot of economic data—and the post-pandemic period has been particularly volatile. It allows insight into a longer-term trend rather than focusing on what just happened a month or two ago.
So what are the longer-term trends telling us about inflation? This is an important question to consider in advance of the Federal Open Market Committee meeting next week because it is likely to be very much on the mind of Powell and his fellow monetary policymakers.
Let’s start with the Personal Consumption Expenditures (PCE) price index. This is the inflation gauge that the Fed uses for both its anonymized projections and its two percent target. It is produced by the Department of Commerce with a lag compared to the Department of Labor’s Consumer Price Index (CPI) and Producer Price Index (PPI). So the latest PCE price index data we have is from October, when the index rose 0.3 percent compared with the prior month. That was exactly what it did in September and August. Obviously, this means the three-month average to 0.3 percent.
More importantly, what we’re seeing here is a failure of inflation, as measured by the PCE price index, to continue to moderate. It appears to have plateaued at a level well above what would be consistent with the Fed’s target. Annualized, this is a 3.6 percent rate of inflation. While that is much lower than the six percent we’ve experienced over the past 12 months, it is very high when judged by the Fed’s commitment to two percent.
On Friday, the Department of Labor released the latest data on the PPI for final demand. This was up 0.3 percent in November, which was exactly the same rise in October and September. In other words, here too inflation appears to have stopped declining and instead plateaued at a high level.
The November CPI will not be released until next week. The Cleveland Fed’s inflation nowcast for November is 0.5 percent, while the consensus forecast is for 0.3 percent. If we split the difference, we get a gain of 0.4 percent. The October CPI came in at 0.4 percent, as did the September CPI — another plateau.
Average hourly earnings, a closely watched measure by the wage-inflation-fearing Fed, has not plateaued. Instead, it has been steadily climbing from 0.3 percent in August, to 0.4 percent in September, to 0.5 percent in October, and 0.6 percent in November. Anyone looking for disinflationary pressure from wages is not going to find it in the average hourly earnings data.
The picture this paints is one of inflation becoming entrenched at a high level rather than continuing to decline under pressure from the Fed’s interest rate hikes and the easing of supply chain problems. Incidentally, the University of Michigan’s measure of inflation expectations over the last five years has been locked in a range of 2.9 percent to 3.1 percent for 16 out of the last 17 months, according to the University of Michigan’s survey of consumers director Joanne Hsu. That’s another sign of entrenchment at a high level.
This is likely to strike Powell as extremely frustrating. While he has often said that monetary policy acts on the economy with long and variable lags, it cannot be comforting to see that the progress the Fed made against inflation this summer appears to have stalled in the autumn months.
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