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Earlier this month, my examination of one of the two main official U.S. measures of inflation concluded that even though it showed a recent month-to-month acceleration (especially in January), it was still too early to declare that it was close to spinning out of control, or even being sure to stay at current excessive levels. That was because, as I read these Consumer Price Index (CPI) data, the most important results (the annual figures) were being distorted by a “baseline effect.”

Specifically, the previous year’s inflation rate was so abnormally low (due to the depressing effect on the entire economy of the CCP Virus’ arrival and the lockdowns and behavioral changes it spurred) that any economic return to normality was bound to produce annual inflation rates that were abnormally high in comparison. Moreover, those 2019-2020 inflation rates made clear to me that the baseline effect would be with us through the February figures (which will come out next month).

Today, Washington released the other main set of inflation figures – the price indexes for Personal Consumption Expenditures (PCE). They’re of special interest because they’re the gauge preferred by the Federal Reserve, and the Fed’s reaction to inflation greatly influences how fast or slow the economy grows. 

And even more interesting: The PCE numbers also reveal a continuing baseline effect that’s got another month to run.

Let’s start, as always, with the monthly percentage changes in the overall PCE inflation rate going back to January, 2021:

Jan.             0.3

Feb.            0.3

March         0.6

April           0.6

May            0.5

June            0.5

July            0.4

Aug.           0.4

Sept.           0.3

Oct.            0.6 

Nov.           0.6

Dec.           0.5

Jan.            0.6

The acceleration in this inflation measure is obvious from looking at the first four months of last year. But then it stops. It’s true that some momentum was regained after summer and autumn slowdown, but since October, it’s remained steady. Moreover, recent revisions (downward for October, upward for December) have cancelled each other out.

Since a prime reason inflation is viewed with such alarm is its tendency to feed on itself, a leveling off in the rate of increase indicates that the worst isn’t in store (although it’s crucial to remember that this doesn’t mean that prices have stopped rising – only that they’ve stopped rising at ever faster rates).

Looking even more stable lately have been the “core” PCE monthly inflation rates. These strip out food and energy data because prices in those sectors are considered volatile for reasons supposedly having little or nothing to do with the economy’s fundamental vulnerability to inflation (like weather events, or the policies of foreign cartels). In fact, as shown below, they’ve shown no monthly speed up at all since October, and only the same modest acceleration from an equally modest summer slowdown:

Jan.             0.2

Feb.            0.1

March        0.4

April          0.6

May           0.6

June           0.5

July            0.3

Aug.           0.3

Sept.           0.2

Oct.            0.5

Nov.           0.5

Dec.           0.5

Jan.            0.5

The annual percentage changes by month in the headine PCE inflation rate do show genuine and continued acceleration throughout the year:

Jan.            1.4

Feb.           1.6

March        2.5

April          3.6

May           4.0

June           4.0

July            4.1

Aug.           4.2

Sept.           4.4

Oct.            5.1

Nov.           5.6

Dec.           5.8

Jan.            6.1

But as has been the case for the entire year, the comparable annual PCE rate for the previous year was rock-bottom, as the below 2019-2020 (and for January, 2021, the January, 2020-21 year) statistics show. How do we know they were uusually low? Chiefly because they fell short of even (historically modest) two percent annual increases that the Federal Reserve has long viewed as a desirable inflation rate. The misses, moreover, were substantial:

Jan.            1.8

Feb.           1.8

March       1.3

April         0.6

May          0.5

June          0.9

July          1.0

Aug.         1.2

Sept.         1.4

Oct.          1.2

Nov.         1.2

Dec.         1.3

Jan. 20-21            1.4

Further, as noted above, the previous year’s inflation rate didn’t top two percent until March, 2021, and a further big spurt, which understandably started igniting inflation fears, only came in April. Here are those numbers:

Feb. 20-21          1.6

March 20-21       2.5

April 20-21         3.6

So that’s why I’m arguing that we’ll be seeing an important and distorting baseline effect for at least a month more, and that if the March numbers show no meaningful moderation in the annual inflation rate, that’s a sign of trouble. And this conclusion goes double for April.

The same analysis is warranted by the core inflation data, IMO. Here are those annual percentage changes going back to January, 2021, and extending through last month:

Jan.            1.5

Feb.           1.5

March        2.0

April          3.1

May           3.5

June           3.5

July            3.6

Aug.          3.6

Sept.          3.7

Oct.           4.2

Nov.          4.7

Dec.          4.9

Jan. 20-21           5.2

Again, taken in isolation, the picture they paint looks like worrisome inflation acceleration. But the previous year’s annual figures reveal a considerable baseline effect, too:

Jan.            1.7

Feb.           1.9

March       1.7

April         0.9

May         1.0

June         1.1

July          1.3

Aug.        1.4

Sept.       1.5

Oct.        1.4

Nov.       1.3

Dec.       1.4

Jan 20-21           1.4

As shown below, core PCE inflation began picking up at an annual rate more slowly last year than overall PCE. So in this case, the telltale month looks much more like April than March

Feb. 20-21          1.5

March 20-21      2.0

April 20-21        3.1

The baseline effect clearly isn’t responsible for all America’s recent inflation. The long-time stop-start nature of the CCP Virus-era economy (whose effects are still with us) and related supply chain snags and bottlenecks deserve much blame, too, along with the massive stimulus provided both by super-easy Federal Reserve monetary policies and generous pandemic relief provided by Congress and both the Trump and Biden administrations. But inflation’s failure to keep accelerating even as these approaches continued for much of last year is a major reason for keeping the baseline effect very much in mind – for at least a little while longer