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Breitbart Business Digest: Inflation Takes Root


Jerome Powell is an average guy.

Do not mistake yourself. We are not accusing the chairman of the Federal Reserve of being mediocre. This is the kind of judgment best left to history or its author.

What we mean is that when Powell looks at economic data, his instinct is not to look at month-over-month changes, but the average of the past few months. There are good reasons to do so. This mitigates the volatility that plagues many economic data – and the post-pandemic period has been particularly volatile. This helps to better understand a longer term trend rather than focusing on what happened a month or two ago.

So what do the longer-term trends tell us about inflation? This is an important issue to consider ahead of the Federal Open Market Committee meeting next week, as it is likely to be of great concern to Powell and his fellow monetary policy officials.

Let’s start with the personal consumption expenditure (PCE) price index. This is the inflation gauge the Fed uses for both its anonymized projections and its 2% target. It is produced by the Ministry of Commerce with a lag from the Consumer Price Index (CPI) and the Producer Price Index (PPI) of the Ministry of Labour. So the latest PCE price index data we have is from October, when the index rose 0.3% from the previous month. This is exactly what he did in September and August. Obviously, that means the three-month average at 0.3 percent.

More importantly, what we see here is a failure of inflation, as measured by the PCE price index, to continue to moderate. It appears to have capped at a level well above what would be in line with the Fed’s target. Annualized, this is an inflation rate of 3.6%. While this is well below the 6% we’ve seen over the past 12 months, it’s very high judging by the Fed’s 2% commitment.

On Friday, the Department of Labor released the latest PPI data for final demand. This was an increase of 0.3% in November, exactly the same increase in October and September. In other words, here too, inflation seems to have stopped falling and is capping at a high level.

The November CPI won’t be released until next week. The Cleveland Fed inflation forecast for November is 0.5%, while the consensus forecast is 0.3%. If we split the difference, we get a gain of 0.4%. The October CPI came in at 0.4%, as did the September CPI – another plateau.

The average hourly wage, a measure closely watched by the Fed which fears wage inflation, has not plateaued. Instead, it rose steadily, from 0.3% in August to 0.4% in September, 0.5% in October and 0.6% in November. Anyone looking for disinflationary wage pressure will not find it in average hourly wage data.

The picture this paints is one of inflation entrenching itself at a high level rather than continuing to fall under pressure from Fed interest rate hikes and the easing of the chain’s problems. supply. Incidentally, the University of Michigan’s measure of inflation expectations over the past five years has been stuck in a 2.9% to 3.1% range for 16 of the past 17 months, according to the survey. University of Michigan with Director of Consumers Joanne Hsu. This is another sign of rooting at a high level.

This is likely to strike Powell as extremely frustrating. While he has often said that monetary policy acts on the economy with long and variable lags, it cannot be comforting to see that the Fed’s progress against inflation this summer seems to have stopped at the end of the year. fall.


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