This morning saw the latest shot fired in the analytical war being fought over whether recent U.S. inflation is “transitory” – i.e., due to CCP Virus-related disruptions to the nation’s supply chains and labor markets, and therefore bound to ease once normality returns – or reflects deeper, more lasting changes in the economy. And the new findings from the Commerce Department modestly strengthen claims of the transitory-istas (like me).
Today’s data cover what are called the price indexes for personal consumption expenditures (PCE). They’re one of the two sets of statistics measuring U.S. inflation rates (the other being the consumer price index – CPI), and they’re of special interest because they’re the numbers most closely tracked by the Federal Reserve – whose policies do so much to determine inflation rates and in turn the economy’s overall growth.
The results? On a monthly basis, CPE rose by 0.3 percent in September, and the core reading (excluding food and energy prices, which can be volatile for reasons, like weather, having little to do with the economy’s fundamentals) was up 0.2 percent. The annual increases for these indexes were 4.4 percent and 3.6 percent respectively.
But these isolated numbers say nothing about the issue driving the transitory debate: whether inflation is gaining or losing momentum. And momentum is crucial because the biggest danger posed by inflation is its tendency to feed on itself. That is, businesses that face rising costs for the goods and services they use seek to pass them on to their customers (other businesses and consumers). The business customers respond by seeking to pass those costs along to their own customers, while consumers seek pay raises to keep up with mounting living costs. But these moves force up more costs for their employers. And so on.
So it’s crucial to note that three of the four new CPE readings support the transitory-istas. Here are the monthly percentage increases for this year so far:
Far from seeing growing inflation momentum, the pace of price increases seems to be stabilizing – and at a rate half that seen during the spring.
The problem comes in with the year-on-year PCE data. They’re more important than the monthly results because they measure the trend over a longer period of time. Therefore, they tend to smooth out the kinds of fluctuations that can distort shorter-term figures. Here’s how they look, and you can see that these annual inflation rates remain on the upswing.
The monthly core inflation data, though, look better from a momentum standpoint:
In fact, momentum-wise, the monthly core data look a lot like the monthly overall data – except that as of September, the price increase slowdown has been even greater. It’s just a third of peak spring levels, not half.
The year-on-year core numbers aren’t as encouraging as the monthly core numbers. But they’re more heartening from the year-on-year overall PCE figures. For rather than showing a September rise, and increases for the entire year, they make clear stabilization since June.
Before we get too enthusiastic, though, it’s critical to remember that these inflation statistics build upon each other. That is, using these last core figures as an example, “stabilization” doesn’t mean that price hikes have stopped. They simply mean that prices have started rising at the same rate each month, or on an annual basis. So if August and September core prices are both up 3.6 percent each annually, then the September figure added 3.6 percent to the August number. And these results are definitely higher than their pre-pandemic counterparts. So don’t expect relief in the sense of falling prices anytime soon for any of these major inflation categories. (Individual products and services can be another story.)
Again, however, when we’re talking about the outlook, momentum’s the dominant consideration, because the performance of something as gargantuan as the U.S. economy doesn’t change direction overnight, or even quickly (barring a total economic disaster like a burst bubble, or a non-economic shock like a pandemic). In fact, what happens is that the statistical curve bends – as with various pandemic indicators. And since the September PCE release reports downward bending or flattening curves for most of the inflation measures, it’s got to be scored as a win for the transitory-istas – though anything but a rout.