The December CPI (Consumer Price Index) report, released by the BLS (Bureau of Labor Statistics) is bad news on the inflation front. By almost any measure, CPI inflation is up. By our recently discussed “constant gain” measure of trend inflation, it rose by 0.4 percentage points for the overall CPI, and by 0.15 percentage points for core CPI (excluding food and energy). On a year-over-year basis, overall CPI rose 0.2 percentage points while core CPI fell by 0.1 points. The figures below show that the one-month annualized inflation rates are also up.
For monetary policy, what presumably matters is not what’s happening with CPI inflation but rather PCE (Personal Consumption Expenditures) price inflation since core PCE inflation is what the Fed looks at. Although it is probably the case that the CPI works to influence the policy makers. The PCE data won’t be released for another two weeks. However, given the broad similarity in the goods covered by the CPI and PCE deflator, it’s a reasonable guess that (core) PCE inflation will also be up. If so, the Fed will be faced with some difficult choices: Do they treat December as (maybe) an aberration and stand pat, or will they view December as the harbinger of another inflationary pulse? Or, cognizant of the long and variable lags associated with the effects of monetary policy, will the Fed leave rates unchanged since they’re already added enough tightening? Having said that, the “trend” line has not risen by much and for the core is basically flat. Therefore, from a long and variable lag perspective it seems doubtful that the Fed will alter their current stance at the meeting at the end of the month.
