By Paul Gomme and Peter Rupert
The BLS announced that the CPI rose 0.89% on an annualized basis. The year over year increase was 3.30%. Our trend measure came in at 1.92%. The CPI ex food and energy saw a 2.62% increase on an annualized basis with the year over year measure at 2.47% and the trend measure at 2.17%.
It is obvious from the graphs that inflation has been trending down over the past few years. The new Fed Chair, Kevin Warsh, has mentioned that he is thinking about alternative measures of inflation, such as some form of trimming. See the recent post on this here. The 16% trimmed mean, first introduced by the Cleveland Fed came in at 2.71%.
Since the spike in 2021-22, inflation has receded but remains somewhat elevated. Although the Michigan consumer inflation expectations consumer’s expectations shows inflation near 5% one year out, the implied measure from the Cleveland Fed shows a much tamer view.
Inflation expectations can also be derived from financial data. For a particular maturity, breakeven inflation is defined as the difference between the nominal return on government securities (Treasury Constant Maturity Securities) and the real return on government securities (Treasury Inflation-Indexed Constant Maturity Securities). Breakeven inflation represents market participants’ expectations for inflation at various horizons, from 5 to 30 years. Since 2021, markets have consistently priced in expectations for inflation that exceed the Fed’s 2% inflation target. However, we should adjust breakeven inflation to account for the fact that the Treasury Securities pay out based on the all items CPI, not core PCE, inflation. Historically, CPI inflation runs between 1/3 and 1/2 percentage points higher than PCE inflation. On this basis, markets may be pricing in inflation at the Fed’s stated 2% target.
It is evident that by almost any measure, the Fed has its work cut out. As always, it is a balancing act. If indeed, as Warsh has admitted, 2% will be hit, then it is much more likely to see rate increases going forward.
