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The new official figures on the Federal Reserve’s preferred gauge of consumer inflation are a good news/bad news story only if you follow the economy closely.

They amounted to good news for that group because they’ve made the inflation picture clearer than it’s been since the economy began recovering from the deep spring, 2020 downturn generated by the arrival in force of the CCP Virus and all the mandated and voluntary curbs on individual and business behavior it produced. And it’s noteworthy that the group includes the Fed, which bears the federal government’s prime responsibility for keeping inflation under control.

Specifically, today’s data represent annual inflation figures (the ones that attract the most attention because they measure price changes over a reasonable period of time) that finally aren’t being substantially distorted by baseline effects. That is, the multi-decade highs they’ve hit no longer stem significantly from the fact that the previous pandemic-y year’s inflation levels were so abnormally low.

But the new results for the price indexes for personal consumption expenditures (PCE) were bad news for everyone else. For they still did show near-multi-decade highs, and the baseline boost has now been in essence replaced by an energy price boost largely created by Ukraine war-related disruptions that aren’t likely to end any time soon.

It’s true that the U.S. government and most students of the economy distinguish between the inflation rates with and without energy prices, since the latter, along with food prices, are seen as prone to shocks that have nothing to do with the economy’s fundamental vulnerability to inflation. But it’s also true that this distinction can get awfully artificial awfully quickly because energy is used so prominently to turn out practically every good and service that Americans buy. So if energy prices remain strongly on the rise, prices everywhere else are bound to feel the effects. Or at least they’re bound to feel the effects until and unless businesses figure out how to offset their higher energy costs with greater efficiencies.

The first clues that energy prices are now unquestionably major inflation drivers comes from the month-to-month figures for overall PCE percentage change – which do include food and energy prices – starting with 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.            0.5

Feb.           0.6 revised to 0.5

March       0.9

As is clear, overall monthly PCE really took off in March – reaching its highest level during this period after several months of virtually identical monthly increases (which themselves jumped to a new level starting in October).

Keep in mind that these numbers don’t show that prices stopped rising during that period. What they show is that they weren’t rising at ever faster rates, which matters because one of the biggest fears harbored about inflation concerns its tendency to feed on itself and spiral out of control.

When food and energy prices are stripped out, and so-called core inflation can be seen, the monthly trend since January, 2021, is significantly different. Since last October, weakening momentum (though not actually falling prices) is the story here. And the sequential percentage increases in absolute terms have been lower recently. That’s why it’s ever more obvious that recent inflation is due mainly to those two supposedly volatile food and energy sectors. Here are these core PCE rises:

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

Feb.           0.4 revised to 0.3

March        0.3

As always, the baseline effect emerges upon examining the annual rates of change in inflation. Here they are for overall inflation since January, 2021:

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.  21-22           6..0

Feb. 21-22           6.4 revised to 6.3

March 21-22        6.6

Again, the latest March figure is the highest in the series, and again, the pace quickened dramatically starting last October.

The annual inflation rates for the previous year, though, demonstrate a big fade in the baseline effect starting in March. Here they are in percentage terms.  

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

Feb. 20-21          1.6

March 20-21       2.5

Think of it this way: For many years before the CCP Virus began distorting the economy the Federal Reserve struggled to push yearly inflation up to two percent and keep it there for decent intervals. The central bank reasoned (correctly, IMO), that when prices rise too slowly, that can threaten deflation – a period prices that are falling in absolute terms. And when that happens, consumers in particular keep putting off purchases in hopes of finding better bargains in the future, demand for goods and services keeps dropping, production eventually follows suit, and a recession can ensue that’s not only deep but very difficult to escape as the new sets of expectations create their own downward spiral.

But as shown above, for all of (pandemic-y) 2020, annual inflation rates were well below two percent, and they stayed there till March, 2021. So the latest annual overall PCE figure of 6.9 percent (for this March) is coming off an overall PCE figure for last March that was already pretty strong. And the upcoming number for April, 2022 will represent the change from an April, 2021 figure that was much stronger – 3.6 percent. Unless that next annual overall inflation rate comes down considerably, the case that overall price increases have entered a new, more worrisome phase, will look awfully convincing.

The baseline fade is less pronounced so far for core PCE. Here are the annual percentage change figures starting again with January, 2021:

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. 21-22             5.2

Feb. 21-22            5.4 revised to 5.3

March 21-22        5.2

Where the month-to-month figures showed weakened recent momentum as well as lower prices, these show stalled recent momentum – which isn’t greatly different given inflation’s above-noted tendency to keep speeding up.

And here are the annual core figures for the preceding year

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

Feb. 20-21            1.5

March 20-21         2.0

Judging by that two percent Fed target, these 2020 and early 2021 annual core inflation rates were decidedly feeble, and only hit two percent in March, 2021. So a baseline effect arguably remains in place here, and as I wrote previously, and probably won’t end until next month – because the April, 2021 annual core inflation rate breached the Fed target (and then some), rising all the way to 3.1 percent.

And as with overall PCE inflation, if that next core result (for April) doesn’t fall significantly, this type of price increase will start looking troublingly elevated for reasons related to current, not past, economic trends and developments. Further, even though the absolute core PCE rate is, as noted, lower than the over PCE rate, it’s still near multi-decade highs and, again, it’s sure to be increasingly affected by lofty energy prices for the foreseeable future.

Wall Street Journal columnist Greg Ip wrote Wednesday that the Ukraine war and its fallout could be “a prelude to an era in which geopolitical tensions, protectionist policies and natural disasters repeatedly stress the world’s supply networks. Central banks, which spent the last decade fighting off deflationary headwinds, might spend the next battling inflationary headwinds.”

Today’s PCE data look like they support that call to me.