The latest from the San Francisco Fed shows that a broad set of inflation indicators continue to trend lower. Despite massive intervention the Fed has been unable to generate any sort of substantial move higher in inflation rates:
- The latest inflation data have been consistent with the view that inflation is low and drifting even lower. In October, overall personal consumption expenditures (PCE) inflation was 1.3% over the past 12 months, while core PCE inflation was 0.9%, the lowest 12-month change in the history of that series. We forecast inflation will remain at this low level or drift a bit lower for the next several quarters before slowly turning up.
- These low inflation readings sometimes contradict gut instincts, since we all see prices that have risen noticeably more than 1% over the past year. The table labeled “Despite Some Price Increases, Inflation Is Low” shows the 12-month change in the overall consumer price index and the price changes for some noteworthy goods and services over the same period. Although some items have risen in price over the past year, others have stayed the same or even fallen. Apparel prices are down about 1.3%. The prices of recreation goods, including televisions, are down about 1% overall. Despite a 5.7% increase in the meat, fish, and eggs category, the overall groceries or food-at-home category rose about 1.4%, very close to the overall change in the CPI. Rent is about unchanged over the past year, and this category makes up a large fraction of the typical household’s expenses. Note that the rent category includes owner’s equivalent rent, the imputed rental value of a dwelling, which the Bureau of Labor Statistics uses to measure homeowners’ housing costs. If house prices and mortgage payments were used to measure housing costs instead of owner’s equivalent rent, the cost of owner-occupied housing would have fallen over the past year.
- To avoid some of the volatility in the inflation data associated with food and energy prices, economists often emphasize “core” measures of inflation such as the core CPI and core PCE price index. But there are other ways to exclude some of the volatility in the monthly inflation data. For example, the median CPI, produced by the Cleveland Federal Reserve Bank, takes the CPI’s underlying detail and reports the price increase of the middle component. The trimmed mean PCE price index, produced by the Dallas Federal Reserve Bank, takes the underlying detail of the PCE price index, drops the components that rose or fell most, and averages the price changes of the remaining components. All these methods of stripping out volatility from the inflation data tell essentially the same story over the past 10 years. When there was substantial slack in the economy in 2001-03, inflation fell. Inflation gradually rose again through 2008, and has since fallen sharply as a result of the severe 2008 recession and the continuing high level of economic slack. Currently, underlying inflation seems to be running at a rate of 0.5% to 1%. We forecast that this trend will continue a bit further before it levels out.