The Fed’s Favorite Lowball Inflation Gauge is Searing, Unseen in Decades, Even Without the “Base Effect”

The majestic inflation overrun has arrived.

By Wolf Richter for WOLF STREET.

The Fed’s preferred measure of inflation, typically the lowest inflation measure provided by the US government – well below even the Consumer Price Index which already underestimates real inflation – and therefore our The lowest inflation measure, and therefore the Fed’s preferred inflation measure, was released this morning, and it was a doozie, although it was the most underdeveloped measure of inflation. estimated that the United States has so far proposed.

The personal consumption expenditure price index excluding food and energy, the core PCE index, jumped 0.7% in April from March, after jumping 0.4% in March from February, according to the Bureau of Economic Analysis today. These two months combine into an annualized core CPE inflation rate of 6.4%, meaning that if price increases continue for 12 months at the pace of the past two months, annual inflation would be 6.4%, as measured by the lower measurement. The United States has.

This is the highest two-month annualized rate since 1985. And it shows how suddenly inflation has warmed up in March and April.

Over the past three months – so in April, March and February – the annualized increase in core CPI inflation has been 4.9%, the highest since 1990.

The annualized PCE index eliminates the legitimate problem of the “base effect” that is now hinted at to eliminate inflation data (I discussed the base effect in early April to prepare for what was to come).

The base effect only applies to year-to-year comparisons. In March of last year, the PCE base price index fell 0.1% from February, and in April, it was down 0.4% from March. So, comparing today’s PCE index to that April drop (the lower “base”) would include the base effect.

The BEA also publishes an annualized version of the PCE price index in its quarterly GDP report. In the first quarter, this annualized PCE price index rose 3.7%. But being quarterly, it did not include the April peak.

The three-month annualized base PCE eliminates the base effect. It shows the pace of inflation over the past three months and projects what it would look like if it continued for an entire year. It was 4.9%, the highest since 1990:

On a year-over-year basis and not on an annualized basis, the core PCE jumped 3.1%, the largest increase since 1992. This includes the base effect. But that also includes another effect, in the opposite direction: the very low core PCE inflation rate last fall is dampening the current inflation surge. So this metric exaggerated the current rate of core PCE inflation due to the base effect; and that underestimated the current PCE inflation rate due to very low inflation in the fall of last year. The two effects combined probably balance each other out:

This PCE core is therefore the weakest inflation measure the United States has concocted so far. And this is the one the Fed uses as a benchmark for its “symmetrical” inflation target of 2%. The green line in the graph above indicates this 2% target.

“Symmetric” for the Fed now means that inflation can go above 2% for a while after being below 2%. The Fed did not say exactly how far the Core PCE can exceed the 2% target and for how long it can exceed it. But he said he would be “patient”.

My gut tells me that some of the crazy price increases we’ve seen recently will eventually fade, like spikes in WTF used vehicle prices and new vehicle price increases amid stories that even GM and Ford dealers sell trucks at an equal or greater price. sticker, and amid data showing that these price increases have generated record gross profits for dealers.

My gut tells me that part of this will subside, that buyers will eventually have enough, and sales will go down at those prices, and prices should go down. But they probably won’t go back to where they were, but will stay significantly higher and eventually start rising again from there.

And during that time, services are going to accelerate, like the prices of plane tickets, or rents, or health care expenses, or a million other services. This movement is now launched. Some of the price increases will be “temporary” and then give up some of the gains, before resuming their ascent, while others will take their place and rise in a mole-hit inflation game that the consumer will pay for.

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