To get John Authers' newsletter delivered directly to your inbox, sign up here. How worried about persistent inflation should we be? And perhaps even more to the point, how worried is the Federal Reserve likely to be? Digging into the latest data release suggests that the risks of persistent inflation are increasing, while shifting politics in Washington D. C. suggest that we may soon have a new and relatively unfamiliar senior team at the top of the Fed to interpret those data. The following charts come from Alex Pelle, U. S. economist at Mizuho Financial Group Inc. in New York. Last week’s personal consumption expenditure, or PCE, data for August were initially hailed in the market as showing that inflation pressures were reducing. Pelle argues that they show the opposite. PCE inflation rose slightly month-on-month in August compared to September, even though there was a reduction in the contribution from restaurants, air travel and hotels, three sectors that should directly benefit from post-pandemic reopening:Meanwhile, a look at all the broad categories of the PCE basket found that most were distinctly above their typical range (from the 25th to the 75th percentile) over the previous three decades. Pelle found:Beyond digging into the official data, Pelle has also contributed to the growing industry of looking through the Fed’s archives for every last piece of research on inflation, in the hope of finding clues as to how the institution as a whole would be perceiving the persistence of the phenomenon. This yields research by the San Francisco Fed into cyclical and acyclical inflation. Broadly, acyclical inflation arrives in the form of sudden shocks and will often be transitory. Cyclical inflation, tied to moves in the economic cycle, will develop more steadily and slowly, and will be much harder to bring down once it has risen. By the San Francisco Fed’s calculations, acyclical inflation actually went negative early in the pandemic, and then shot up to its highest level in many years. This confirms the intuition that a big part of this year’s inflation spike was indeed a transitory phenomenon that would soon be corrected. The good news is that acyclical inflation has indeed now begun to fall slightly from its peak. The bad news, which more than outbalances the good, is that cyclical inflation has now slightly overtaken it:Cyclical inflation is now at its highest since 2006, before the financial crisis. To an extent this is positive, as it is a symptom of recovery in the economy. But such a sharp increase from an already high level is unusual, and suggests the Fed should be careful. Take this in conjunction with the lesson of the rising “underlying inflation gauge” produced by the New York Fed, and it’s easy to put together a narrative to explain the central bank’s sharply more hawkish tone in the last few weeks.
All data is taken from the source: http://bloomberg.com
Article Link: https://www.bloomberg.com/opinion/articles/2021-10-06/durable-inflation-risks-are-rising-may-be-severe-test-for-fed?srnd=premium
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