Tag: inflation

August Inflation

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

The Bureau of Labor Statistics announced that the consumer price index (CPI) increased 0.2% over the month on a seasonally adjusted basis. On an annualized basis, the CPI increased 2.27%, up 0.41 percentage points from July’s 1.88%. The year over year reading was 2.59% which is down 0.33 points from the 2.92% recorded in July. One way to think about the fall in the year-over-year inflation rate is that it’s the average of the current and past 11 months’ monthly inflation rates. Consequently, the decline in the year-over-year inflation rate can be attributed to dropping the 6.32% monthly inflation rate from August 2023 while adding the lower 2.27% for August 2024. Our preferred trend measure came in at 1.87%. While the trend number looks pretty good on the surface at 1.87% it has been creeping up over the last few months: 1.58% in June, 1.68% in July and now 1.87% in August.

The core (ex food and energy, CPIX) measures tell a slightly worse story, with the annualized number hitting 3.42%, the year over year up 3.26% and our trend measure up 2.68%. There were very large declines in the monthly numbers for energy products: gasoline down 0.6%, fuel oil down 1.9% and energy services down 0.9%. Used cars and trucks also saw a large decline of 1.0%.

Chairman Powell has all but promised “Christmas in September” in the form of a cut in the Fed funds rate. Moreover, given the relationship between the CPI measures and the Fed’s preferred Personal Consumption Expenditure core measure means that this measure of inflation will likely show an increase when it’s released in a couple of weeks. While the unemployment rate has been creeping up, real output growth has been robust. (If the US is deemed in some dire situation with a 4.2% unemployment rate, pity Canadians with their 6.6% rate) In our humble opinions, the current inflation data do not warrant such a cut, much less the 50 basis point cut hoped for by some commentators.

Q2 GDP and June PCE

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

On July 25 the BEA announced that the advance estimate of real GDP increased 2.8% in Q2 on an annualized basis. The gains were fairly widespread, except for residential and non-residential structures, that fell 1.4% and 3.3%, respectively. Personal consumption expenditures, PCE, increased 2.3% and was the largest contributor to overall growth, at 1.57 percentage points.

PCE price index

On July 26, the BEA announced that the personal consumption expenditures, PCE, price index increased 0.95% on an annualized basis. Our preferred trend measure came in at 1.9%.

The Fed’s preferred measure, the PCE ex food and energy came in at 2.2% on an annualized basis while our trend measure came in at 2.6% and has continued to fall for the last 5 months.

As we have mentioned many times before, we believe our trend measure better captures the path of inflation and, more importantly, implications for Fed policy. For example, the annualized monthly change was higher in June, 2.2%, than in May, 1.5%. It seems pretty obvious that the Fed will not change its current stance on policy given this one month blip.

Policy Discussion

No doubt, there will be a lot of chatter about whether the FOMC should lower the Fed funds rate at its July 30-31 meeting, or wait until September. Or something else. To wade through all this, it helps to have a framework to organize thoughts about the incoming data. Arguably, the so-called Taylor rule has the broadest acceptance in the economics-policy profession. Briefly, the Taylor rule says that the Federal funds rate should be set as: (a) the natural real interest rate plus (b) the target inflation rate (2%) with (c) an upward adjustment when actual inflation exceeds target and (d) a downward adjustment reflecting slack on the real side of the economy. Typically, this slack is measured by either the output gap, or the unemployment rate gap. It’s easiest to understand why one of these gaps is included in the Taylor rule by thinking about what happens when there’s a negative gap. In the case of the unemployment rate, the idea is the demand for labor is high. Consequently, either firms will have to offer higher wages, or workers have more bargaining power and can command higher wages. Either way, these nominal wage channels put upward pressure on prices through some sort of “cost push” channel. This could be as simple as firms pricing using a constant markup over their (marginal) costs. In the case of a negative output gap, the story is that demand is outstripping supply, and firms find it easier to raise their prices. Returning to the Taylor rule, the idea is that these gaps reflect future inflationary pressures, and that the FOMC should respond now to head off future inflation.

There’s a lot of wiggle room in the Taylor rule. First, one needs an estimate of the natural real interest rate. The Atlanta Fed’s Taylor rule calculator provides eight (8!) choices for the real interest rate, currently ranging from 0.7% to 2.5%. That said, a given measure of the real interest rate does not change much over time.

Second, how to think about the deviation of inflation from target? As mentioned above, we like our trend measure which has moved down in 2024. The Taylor rule would, then, prescribe a lower Fed funds rate. But that prescription depends on the FOMC having religiously followed the Taylor rule over the past few years — which it almost certainly hasn’t. Nonetheless, some commentators may suggest that it’s time to start lowing the Fed funds rate since PCE inflation has come down in 2024.

Third, how to measure real-side slack? The output gap is given by potential output less actual output. The problem here is the nebulous concept of “potential” output. The fact that FRED has a potential GDP series is of no comfort. (“Fake data!”) To be absolutely clear, the output gap is a made-up number. Similarly, the unemployment rate gap is the difference between the “natural unemployment rate” and the actual unemployment rate. Some may substitute NAIRU (the non-accelerating inflation rate of unemployment) for natural unemployment rate, but it’s the same basic idea. As with the output gap, there’s the problem of measuring the natural unemployment rate. (“More fake data!”) Between the output gap and the unemployment rate gap, the Atlanta Fed provides 18 (yes, 18!) measures of real-side slack. What’s does the Taylor rule say should be happening with the Fed funds rate based on recent real-side data? Currently, estimates of the output gap are positive: there’s slack in the economy which tends to push down the Taylor rule’s prescription for the Fed funds rate. The strong growth in the second quarter is likely to cut the size of this gap (unless of course, potential output is revised!) which calls for a higher Fed funds rate. On the other hand, the unemployment rate has increased, and so the unemployment rate gap has increased which, through the Taylor rule, would call for a lower Fed funds rate.

TLDR: Inflation is coming down; the Taylor rule dictates a lower Fed funds rate. The output gap has narrowed; raise the Fed funds rate. The unemployment gap increased; lower the Fed funds rate.

So, here is the rub, even with the most widely used model at hand, it offers little guidance as to what to do next. Indeed, there is way too much wiggle room to come to a coherent and consistent policy recommendation.

June CPI

Posted on by Paul Gomme

The June CPI numbers point to lower inflation. On an annualized month-over-month basis, CPI inflation fell from 0.07% to -0.67%; core CPI inflation dropped from 1.97% to 0.78%. The year-over-year measures recorded more modest declines, from 3.25% to 2.98% for CPI and 3.41% to 3.28% for core CPI. As we have emphasized in past posts, the monthly inflation rate is quite volatile while the annual inflation rate is slow to reflect changes in trend. For June, our measure of trend CPI inflation plunged by 1.1 percentage point to 1.58% while trend core CPI inflation fell 0.8 percentage point to 2.46%

Policy Implications

In about two weeks, the PCE deflator for June will be released. If our trend core PCE inflation falls by the same 0.8 percentage points that core CPI inflation fell, then trend core PCE inflation will sit at 1.8% – comfortably below the Fed’s 2% target. Alternatively, CPI inflation tends to run about 0.5 percentage points higher than PCE inflation. On this basis, one might expect our trend core PCE inflation for June to come in at 2.1% – just outside the Fed’s 2% target. Chairman Powell’s testimony earlier this week raised expectations of a rate cut this year, although the chairman was silent regarding the timing. Given the declines of the recent numbers, it appears that the Fed has pretty much achieved its longer run inflation goal. The real side of the economy seems to have been mostly unaffected by the rapid increases in the fed funds rate. The FOMC next meets July 30-31. As this stage, the question is: will the FOMC lower its policy rate at the end of July, or wait until September? The debate will probably hinge on what are the potential costs of cutting rates in July, if any? Stay tuned.

Inflation and GDP

Posted on by Paul Gomme

By Paul Gomme and Peter Rupert

The BEA has released PCE (personal consumption expenditure) price data for April. By all measures we look at, this measure of inflation is down. While the annualized monthly core PCE inflation rate dropped from 4.08% to 3.03%, our measure of trend only fell by 0.17 percentage points, from 3.53% to 3.35%. The reduction in our trend core PCE inflation is in line with that reported earlier for the April trend core CPI inflation rate (a drop of 0.2 percentage points). While the year-over-year core PCE inflation rate continues to fall, and run below these other measures of inflation, we anticipate that the year-over-year rate will start rising as the favorable monthly inflation rates in mid-2023 fall out of the calculation of the annual inflation rate.

The picture is largely similar for overall PCE inflation: a large drop for the month-over-month rate and more modest declines for the year-over-year and our trend measures.

The rapid increase in the Fed Funds rate from mid 2022 to mid 2023 and the decline in inflation now has the Fed Funds rate higher than the inflation rate and, more often than not, tends to keep inflation at bay. Note that after the Great Recession the inflation rate was above the Fed Funds rate longer than at any time since the 1960’s.

Earlier, the BEA released its second estimate of GDP for the first quarter of 2024. Output growth for that quarter was revised down slightly from 1.6% to 1.3%.

In the perverse world of monetary policy, slowing GDP growth is considered good news in the sense that so-called inflationary pressures are thought to be easing. Nonetheless (core) PCE inflation is still running above the Fed’s 2% target. Interest rate cuts appear to be some time off in the future.

Inflation Report

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

The BLS announced the January inflation report on February 13, indicating that the CPI rose 3.73% in January on a seasonally adjusted annualized basis. This was much larger than December’s increase of 2.83%. As we have mentioned several times, the one month number is extremely volatile and therefore should not necessarily be a sign of trend inflation on the rise. Having said that, our preferred measure of trend inflation also increased slightly from 2.73% to 3.06%.

A large part of the increase came from the shelter component rising over 7% and is about 36% of a household’s expenditures. Energy components fell somewhat. Yet, core CPI inflation rose from 3.35% in December to 4.81% in January (monthly annualized rates). Our measure of trend core CPI inflation also rose, from 3.43% to 3.89%.

The only bright spot to the CPI report is that year-over-year inflation declined. However, as we learned a couple of years ago, this measure is very slow to respond to changes in trend.

What does the CPI report imply for policy? To start, the Fed’s 2% inflation target is for core PCE (personal consumption expenditures) inflation, not (core) CPI inflation. PCE data for January will not be released until February 29. While the year-over-year core PCE inflation rate for January may fall, based on higher trend CPI inflation, it seems likely that trend core PCE inflation will likewise rise. The Fed will probably want to see a steady decline in underlying inflation toward its target before lowering its interest rate. It seems unlikely that the Fed will be lowering rates soon.

December CPI

Posted on by Paul Gomme

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.

On measuring trend inflation

Posted on by Paul Gomme

One of the challenges over the past couple of years has been measuring trend inflation. As shown in the figure below, monthly inflation rates are volatile; 12-month inflation rates are much smoother, but only slowly reflect changes in trend inflation. Previously, we’ve focused on the 3-month inflation rate.

As shown below, the 3-month inflation rate is approximately the average of three 1-month inflation rates. This means that each month, the 3-month inflation rate adds the current 1-month inflation rate, and drops the 1-month inflation rate from 4 months ago. Consequently, the 3-month inflation rate can drop precipitously if the inflation rate being dropped is relatively high.

A different way of putting the issue is that the calculation for the 3-month inflation rate assigns a weight of 1/3 to each of the past 3 months’ inflation rates, and a weight of 0 to inflation rates 4 or more months ago. Why such a discrete change in weights? Why not a more gradual decline in weights?

The remainder of this post gets into the guts of an alternative measure of trend inflation in which the weights on monthly inflation rates decline with their age. Readers uninterested in the details should feel free to jump to the end which presents our new measure of trend inflation.

The 3-month inflation rate as an average of 1-month inflation rates

Consider the calculation of the gross 3-month (non-annualized) inflation rate for November,

1+\tilde\pi^{(3)}_{November} = \frac{P_{November}}{P_{August}}

where P is the price level (for a given month), and the superscript indicates the horizon over which the inflation rate is computed (3 months in this case). The `tilde’ over \pi indicates that the measure of inflation is not annualized. Similarly, 1-month (non-annualized) inflation rates are given by

1+\tilde\pi^{(1)}_{September} = \frac{P_{September}}{P_{August}}

1+\tilde\pi^{(1)}_{October} = \frac{P_{October}}{P_{September}}

1+\tilde\pi^{(1)}_{November} = \frac{P_{November}}{P_{October}}

From the above, it follows that

1+\tilde\pi^{(3)}_{November} = \left(1+\tilde\pi^{(1)}_{September}\right) \left(1+\tilde\pi^{(1)}_{October}\right) \left(1+\tilde\pi^{(1)}_{November}\right)

The gross 3-month inflation rate is the product of the three immediate past 1-month inflation rates. Taking the natural logarithm,

\ln\left(1+\tilde\pi^{(3)}_{November}\right) = \ln\left(1+\tilde\pi^{(1)}_{September}\right) + \ln\left(1+\tilde\pi^{(1)}_{October}\right) + \ln\left(1+\tilde\pi^{(1)}_{November}\right)

we obtain

\tilde\pi^{(3)}_{November} \simeq \tilde\pi^{(1)}_{September} + \tilde\pi^{(1)}_{October} + \tilde\pi^{(1)}_{November}

where the approximation arises from \ln(1+x) \simeq x for x close to zero.

If we wish to work with annualized inflation rates, then

1+\pi^{(3)}_{November} = \left(\frac{P_{November}}{P_{August}}\right)^{4}

Again taking the natural logarithm, we obtain

\pi^{(3)}_{November} \simeq 4 \tilde\pi^{(3)}_{November}

The 1-month inflation rates will have “12” in the place of “4”. We now have

\pi^{(3)}_{November} \simeq \frac{1}{3} \left[\pi^{(1)}_{September} + \pi^{(1)}_{October} + \pi^{(1)}_{November}\right]

In other words, the 3-month annualized inflation rate for November is (approximately) the average of the three 1-month annualized inflation rates.

A related problem: computing an average

Given 3 observations on some variable, the sample average or mean is

\overline x^{(3)} = \frac{1}{3} \left[x_{1} + x_{2} + x_{3}\right]

Now, if we add a fourth observation,

\overline x^{(4)} = \frac{1}{4} \left[x_{1} + x_{2} + x_{3} + x_{4}\right]

However, computing \overline x^{(4)} as above discards the “work” done in calculating x^{(3)}. From the calculation of \overline x^{(3)},

x_{1} + x_{2} + x_{3} = 3 \overline x^{(3)}

Substituting into the formula for \overline x^{(4)},

\overline x^{(4)} = \frac{1}{4} \left[ 3 \overline x^{(3)} + x_{4} \right]

or,

\overline x^{(4)} = \frac{3}{4} \overline x^{(3)} + \frac{1}{4} x_{4}

This leads to a well-known formula for recursively computing an average:

\overline x^{(t)} = \frac{t-1}{t} \overline x^{(t-1)} + \frac{1}{t} x_{t}

where t is the number of observations. It says that the mean at date t is a weighted average of the previous mean, and the current (date t) observation.

This is all well and good if the population average is constant. But what if the population average changes periodically. If we knew when these changes in population average occur, we would simply discard all the old observations, and start computing the average afresh. When we don’t know when changes in the population average occur, an alternative approach is to apply a constant “gain” or weight to new observations:

\overline x^{(t)} = w x_{t} + (1-w) \overline x^{(t-1)}

where w is the constant weight.

Application: Trend inflation

The discussion above suggests measuring trend inflation via

\pi^{T}_{t} = w \pi^{(1)}_{t} + (1-w) \pi^{T}_{t-1}

In words: trend inflation is a weighted average of the current one-month inflation rate (with weight w), and the previous trend inflation rate (with weight 1-w). Solving this equation backwards gives

\pi^{T}_{t} = w \sum_{j=0}^{\infty} (1-w)^{j} \pi^{(1)}_{t-j}

That is to say, the measure of trend inflation at t is a weighted average of all past inflation rates, and that the weights decline geometrically with time. Put differently, there is a smooth drop off in the importance attached to previous inflation rates. By way of example, for w=1/3, the weight associated with the current inflation rate is 1/3 = 0.333; with the previous month’s inflation rate, 2/9 = 0.222; with the inflation rate 2 months ago, 4/27 = 0.148; and with inflation 12 months ago, roughly 0.00257 — very small.

Our new measure of trend inflation

The figure below plots our `constant-gain’ measure of trend core PCE inflation for a weight of 1/3 on the latest observation, along with the monthly, 3-month, and annual inflation rates. Relative to the 3-month inflation rate, this measure of trend inflation is somewhat smoother while still responding in a timely fashion to apparent changes in trend inflation.

October PCE inflation and GDP revision

Posted on by Paul Gomme

On November 30, the Bureau of Economic Analysis (BEA) released PCE (Personal Consumption Expenditure) data for October 2023. The BEA notes a small monthly change in the PCE deflator (0.6% at an annual rate, down from 4.5% in September), and that the 12-month PCE inflation rate came in at 3.0% (down from 3.4% in September). These numbers largely mirror the earlier CPI (Consumer Price Index) release: the annualized monthly change fell from 4.8% to 0.5%; the 12-month rate from 3.7% to 3.2%. We prefer to look at the 3-month annualized inflation rate which also fell, from 3.7% to 3.2%; CPI inflation fell from 4.9% to 4.4%.

The cognoscenti know that the Fed’s preferred inflation measure is so-called core PCE inflation (taking out the food and energy components). By this measure, the monthly inflation rate fell from 3.8% to 2.0%, a larger decline than recorded by core CPI (3.9% to 2.8%). The 12-month inflation rate fell by 0.2 percentage points, to 3.5%; core CPI inflation fell by 0.1 percentage point to 3.0%. While our preferred 3-month annualized inflation rate fell, it was essentially unchanged at 2.4%. In contrast, the 3-month annualized change in core CPI rose in October, from 3.1% to 3.4%

In summary, the PCE inflation numbers for October confirm what was seen in the CPI inflation reported about two weeks earlier: inflation is down. How much depends on which series you focus upon. Keeping in mind that CPI inflation tends to run about 0.5 percentage points higher than PCE inflation, the data for October suggest that the US economy is approaching the Fed’s 2.0% inflation target.

Gross Domestic Product (Second Estimate)

On November 29 the BEA announced that real GDP for Q3 was revised up from 4.9% to 5.2%. While revisions to nonresidential fixed investment and state and local government spending were the leading causes of the increase, consumer spending was revised down.

Policy outlook

Given the continued decline in the inflation numbers and the continued strength in the output numbers, it appears the economy has digested the record increases in the Fed Funds rate without roiling the real side of the economy. There seems little doubt at this point that Fed policy is achieving its inflation reduction goal and may have reached the peak of the Fed Funds rate during this cycle. That is, nothing in the data points to the need for further increases in the rate and the market is suggesting some rate declines in 2024.

PCE Inflation and Revised GDP for Quarter 1

Posted on by Paul Gomme

The BEA announced May PCE (Personal Consumption Expenditure) data that reinforces the earlier CPI (Consumer Price Index) report: Inflation continues to creep down. Annualizing the month-over-month change in the PCE, inflation for May was 1.55%, well below the Fed’s 2% target. As we have commented before, these month-to-month changes contain a lot of noise and our preferred measure is the annualized 3 month change. By this measure, inflation for May was 2.45% – somewhat higher than the 2.2% reported earlier for the CPI. The headline year-over-year PCE inflation rate for May was 3.85%. As we have emphasized in previous posts, this year-over-year measure of inflation is slow to respond to changes in trend which means it will take some time for the year-over-year inflation rates to reflect the lower inflation rates that have come in over recent months.

Less rosy is the inflation picture coming from core PCE (that is, excluding food and energy). While the month-over-month rate was down in May – from 4.65% to 3.84% – the year-over-year and 3 month measures fell by roughly 0.1 percentage points. Presumably, the reason to look at core PCE inflation is that it provides a better gauge of underlying trend inflation than non-core PCE measures. But for our money, the 3 month PCE inflation rate does a good job capturing developments in trend inflation.

For June, expected inflation is now running below 2% at all horizons. Collectively, the results for CPI, PCE and expected inflation suggest that the tightening of monetary policy over the past year-and-a-half has brought down both actual and expected inflation. In this context, the Fed’s decision in June to pause its tightening of monetary policy seems like a good one, especially if one takes into account the well-known long and variable lags of the effects of monetary policy on the economy.

Finally, while we at Economic Snapshot usually do not comment on GDP (Gross Domestic Product) revisions, we are making an exception for the data released on Thursday by the BEA. The output revision was a very large 0.7 percentage points, from 1.27% to 2.00%. This upward revision of output can be attributed to upward revisions in consumption and exports, and a downward revision of imports (which has a positive effect on output since imports are subtracted from output). These effects were partially offset by small revisions in investment and government spending.

Second
Revision		Third
Revision		Difference
Output1.272.00+0.73
Consumption2.652.93+0.28
Investment-2.10-2.17-0.07
Government0.880.85-0.03
Exports0.661.00+0.33
Imports-0.75-0.37+0.38
GDP growth for the first quarter of 2023, and contributions to GDP growth by its major components.

The increase in real GDP was widespread according to the state GDP estimates. Real GDP increased in all 50 states in Q1. The largest increase came in North Dakota, 12.4% at annual rate and the lowest in Rhode Island and Alabama at 0.1%. Personal income increased in all but two states, Indiana (-1.0%) and Massachusetts (-0.9%).

May Prices

Posted on by peter.c.rupert

By Paul Gomme and Peter Rupert

Consumer Price Index

The BLS announced that the Consumer Price Index for all urban consumers (CPI-U) rose 0.1% in May on a seasonally adjusted basis. This 0.1% rise translates into an annualized 1.5%, well below the Fed’s 2% inflation target (the grey line in the figure below). Over the last 12 months it rose 4.13%. The preferred measure of Econsnapshot is a measure of inflation based on a 3 month interval. We prefer this measure because the year-over-year number moves very slowly while the month to month number is very volatile as seen in the graph below. This 3 month inflation rate grew at an annual rate of 2.2%, just above the Fed’s 2% target.

The bad news from the CPI report is that core CPI inflation — which strips out the more volatile food and energy prices — continues to run at 5% or more, much higher than the Fed’s target. Indeed, energy prices have declined significantly, down almost 12% year over year. When looking at core CPI over the last month it is the shelter component that was the largest contributor to the rise in prices, accounting for about 60% of the overall increase. One reason to look at core CPI inflation is that it may be a better measure of trend inflation than headline CPI. If so, the Fed still has work to do to bring inflation back to target.

Of course, Fed watchers know that the Fed focuses on inflation as measured by the personal consumption expenditure (PCE) price index. Over long periods of time, PCE and CPI inflation generally move together. That said, on average PCE inflation runs below both the CPI and core CPI. The PCE for May won’t be released until June 30. Consequently, the recent CPI inflation rates may provide useful information regarding the direction for PCE inflation.

Producer Price Index

Hard on the heels of the CPI report came that for the Producer Price Index (PPI). Inflation as measured by the PPI has been trending down since early 2022. Indeed, at an annual rate, the monthly and 3 month inflation rates are negative meaning that the price index has recently been falling.

Roughly speaking, the CPI reflects prices paid by the typical urban household while the PPI captures prices received by domestic producers of goods and services. Since the PPI captures prices received by domestic producers while the CPI measures prices paid by consumers, it’s tempting to conjecture that changes in the PPI will eventually be reflected in the CPI. However, there are differences in coverage which mean that this logic does not necessarily hold. For example, since the PPI measures prices received by US producers, it does not include prices of imports; the CPI does. Also, nearly 1/4 of the CPI includes the imputed rent of owner-occupied housing; this imputed rent is not included in the PPI. Finally, only some of the goods and services covered by the PPI represent purchases by consumers; the remainder are goods and services used by other producers, capital investment, exports and government. The Bureau of Economic Activity says that the PPI for Personal Consumption comes closest to the coverage of the CPI. Yet, the chart below shows that inflation as measured by this last measure is much more volatile than the CPI. The chart also shows that there is no obvious tendency for PPI inflation to lead CPI inflation.

Automotive Prices

Since the onset of the pandemic, much has been said and written about supply chain problems, with the automotive sector receiving particular attention, such as this article that makes several blunders and left out some important economics as well. Anyone who has tried to buy a new car knows that there are very long delivery lags, especially for electric vehicles. These issues in the new car market has spilled over into the used car market where prices have also risen. Keep in mind that a one time increase in the price of, say, new cars is not what we typically mean by `inflation’. To be sure, such a one time increase will, for a time, lead to an increase in measured inflation. However, this effect will dissipate with time. The chart below is based on price indices from the CPI. The used car inflation rate was much higher than that of new cars from mid-2020 to mid-2022. Recently, used car prices have been falling, and new car price inflation is moderating. Automotive maintenance and repair price inflation continues to increase.

Finally, turn again to the difference between the PPI and other price indices. From the PPI, prices received by domestic automotive producers grew rapidly through 2021 and 2022, with an inflation rate as high as 30%. While those prices have started to decline, the price level has risen 28.5% since May 2020. Granted, automotive inflation as measured by either the CPI or PCE price index also rose, but not nearly as much as recorded by the PPI, and the recent decline in PPI automotive prices has translated into a slowing of these prices as measured by the CPI and PCE.

The June 13-14 meeting of the Fed revealed a pause in rate hikes. As the graphs above show, there are certainly signs that the Fed’s early moves have worked in their favor. As we remarked above, given the core CPI numbers there still may be more work to do…and the Fed made it clear in the statement that more rate hikes are likely.