U.S. core inflation exceeds forecast


Source here.  As I’ve been saying, I see very little chance of an aggregate demand-based recession this year, the Fed’s December interest rate hike was not an obvious mistake, and we are not in any operative way in a liquidity trap right now.


Hmm. Interesting. I know this is not measured in core inflation but my clients have been seeing 250% increases in food prices, screaming deals in commercial manufactured goods, and low fuel costs. Skilled labor is at a premium as well.

Maybe aggregate numbers are dangerously irrelevant in times of turmoil.

Maybe aggregate numbers are dangerously irrelevant in general.

"but my clients have been seeing 250% increases in food prices"

On what planet do your clients live?

TC's crystal ball is working!

2% is a target, right? Funny target, inasmuch as you can miss on the low-side for years, but just get the merest hint of maybe, barely, exceeding the target on the upside and you get serious think-pieces from leading economists warning of dread inflation. Good work.

I wonder if you have any thoughts on the behavior of long-term REAL rates since the Fed's brilliant move in December (hint- down a quarter point.) It was a mistake. Not the end of the world, but a mistake. Another increase this year would be a bigger mistake.

It is only a few months of rapid core inflation, but if the current trend in core inflation doesn't abate, it will exceed core inflation during the height of the commodities boom in the 2000s, and could well climb about the Fed's target range of 2 to 3%. Housing and healthcare are driving core inflation and they tend to be sticky. Additionally, this is happening amid a U.S. dollar bull market and historic lows in many commodities. Interest rates were at 5% last time core inflation was running this hot. I'm closer to your view and expect this inflation to fizzle out, but if not, the Fed could be far behind the curve within a year.

So if regulations and a stupidly designed government system cause healthcare prices to rise then we need more rate increases? awesome this is going to interesting to watch.


The government creates money by running deficits, and that deficit is increasingly caused by healthcare costs.The people in charge respond to their stupidly designed system by spending more money, which drives up costs, thus requiring more money. Deficits by the federal government are financed by credit, which is a part of the supply of money and credit. That is literally the definition of inflation.

It is a good example of how the human eye reads charts ballistically, with Newtonian physics in the hindbrain. We see a "motion" that is scarier than the level, or the moving average.

It would nice to see with 12 and 24 month moving averages superimposed.

The .chart is of the year-over-year change so what would you gain by looking at the 12 month moving average?

Interestingly, I use the three year moving average as a measure of inflation expectations and the year over year CPI just rose over the three year moving average.for the first time since 2012.

When I look at the period from around December 2014 forward I see an acceleration. It makes me think the sky's the limit, that momentum is in play. As I say, a Newtonian bias, or maybe a few million years of predator-prey interactions. My human brain.

If the acceleration is real, reporting the year over year number as a monthly is good. If it is more likely an artifact of over-sampling, it is bad.

I suspect most people would be better off with a slower moving 12 month moving average of year over year changes, which would help them calm the __ down.

BTW, I agree with what I think is Tyler's subtext, that times are pretty good.

"U.S. core inflation exceeds forecast" --- rather: 'Inflation Forecast by Professional Economists was Wrong'.

The Bloomberg Survey of economists produced forecasts ranging from - 0.5% to + 0.3%.
BLS just reported official core inflation rate at + 0.3%, same as January.
Last time there were back-to-back inflation increases of 0.3% was in early 2001.

Almost all the Bloomberg Survey economists were wrong in their individual forecast.

Have you ever known an economist to be right about anything?

Well, I believe one did predict unoriginal comments.

"but on the other hand..."

Self-recommending unoriginality, one can sincerely hope.

The median forecast of the Bloomberg Survey is almost always exactly right.

..that's great news. With that consistently accurate median Bloomberg Inflation forecast ... I'm now gonna get rich in the currency markets.
Why doesn't the Federal Reserve just use those accurate Bloomberg numbers instead of hiring economists to calculate their own?

So what you're saying is, that you don't understand forecasts or how they are used? Ok, thanks for the heads up.

Was 1991 the last aggregate demand recession?

Core inflation excludes energy (because it is considered volatile). If core inflation included energy, "inflation" would be far lower. What's the likelihood of significantly higher energy prices? On the other hand, core inflation includes housing, which is experiencing another bubble. If core inflation excluded housing, "inflation" would be far lower. What's the likelihood of another housing correction?

Core inflation only includes housing in a very roundabout way. OER is the included calculation and it is calculated like this: "The amount of rent that could be paid to substitute a currently owned house for an equivalent rental property. Owners' equivalent rent (OER) is a dollar amount that is published by the U.S. Bureau of Labor Statistics to measure the change in implicit rent, which is the amount a homeowner would pay to rent or would earn from renting his or her home in a competitive market.
Owners' equivalent rent is obtained by directly asking sampled homeowners the following question: "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?"

Thus increases in home prices only get passed through to CPI in a lagged and very rough fashion.

WTI crude oil is trading at $38 today, more that 25% above its January low under $30.

It looks like oil is already significantly higher.

Gasoline prices are already moving higher as well.

True. And, gasoline prices are on the upswing.

Gold is higher by about $30, or 2.45%, on the day; and up in double digits for YTD.

However, oil supplies are above demand and it is expected that oil will decline to sub-$30.

I'm not sure about gold and inflationary expectations. Some say it's rise has been based on negative real interest rates.

As I said in another thread, the number of houses per capita is still decreasing. I don't think there's much potential for downside.

What I think happened in southern California was that the whole market overshot the entry level buyer, and you can't do trade up for everyone without someone coming in at the bottom.

Right now Zillow shows that authentic single family homes in Orange County start at around $450K. That's the entry price.

Think property zoning and housing costs.

An interesting question is whether the Fed can safely obtain a 2% inflation rate on the PCE, while most cities criminalize robust construction in housing markets.

Obtaining such a low rate of inflation, given the structural impediments in the US economy, may lead to chronic financial instability an unforeseen and unintended consequences.

PANIC!!! Isn't just housing and healthcare here? However, I do agree it might wise to tighten (say .50% to 1%) to avoid housing going up too much. Also, I am not sure what food prices are going up as the prices I have seen a down 1- 5%. I bought gallon of milk for $2.30 and hamburger meat is down to $3.25/pound over the weekend.

However, we are in an Aggregate Demand Recession but it is not US:
1) The AD is missing globally not in the US.
2) The population demographics in Europe & East Asia are having a larger impact on AD.

Since we are not in a liquidity trap, does this mean that Tyler agrees that, going forward at least, AD will be whatever the Fed wants it to be? Also, the distinction between the Fed causing an AD-based recession vs. not offsetting non-monetary AD forces, a topic from a few weeks ago, is not that meaningful? After all, the purpose of the not-obviously-a-mistake December rate increase was to pre-emptively head off future unforeseen positive NGDP shocks, i.e., to avoid falling behind the curve on inflation.

I'm reminded of Larry Summers' Okun Lecture given as the crisis was unfolding and his explanation: that the Fed had been insufficiently diligent in identifying and attacking the "inflation" (i.e., housing bubble) lurking in the background because economists (like himself) had learned how to overcome the Phillips Curve. To his credit, Summers has since modified (i.e., completely changed) his explanation based on his observations of events that followed the crisis. To his credit.

It seemed only yesterday that Paul Krugman and Lawrence Summers were wailing that a Fed rate hike had the potential to stop the recovery in its tracks, especially when inflation was so low. Now the Fed has raised its Fund Rate and despite that inflation has gone up.

Actually that last sentence is incorrect. Inflation has gone up because the Fed raised the Fund Rate.

Now that assertion seems to violate all common sense. After all Paul Volcker did not kill inflation by lowering interest rates, he did it by raising interest rates to very high levels. Or to argue another way, raising the price of bread does not increase the demand for it.

But the graphs on http://www.philipji.com/item/2016-03-10/does-raising-the-fed-funds-rate-raise-inflation show clearly that raising the Fed Funds Rate from very low levels precedes an increase in inflation on numerous occasions.

An analogy will explain why the connection is indeed causal. Imagine that a certain kind of steel is used both by manufacturers of kitchen gas burners and by manufacturers of aircraft turbines. The gas burner manufacturers operate on margins of 5%, the manufacturers of aircraft turbines have margins of 25%. A 10% increase in the price of that steel puts it beyond the reach of kitchen burner manufacturers. For aircraft turbine manufacturers, on the other hand, an increase in the price of steel means more of it is available to them and their consumption increases.

Financial firms, like hedge funds, thrive when interest rates are very low because it makes leverage ultra-cheap. Even a small increase in the interest rate ravages their returns, reduces their demand for money (especially when a monetary contraction is on, as at present) and diverts money to the real economy. I have explained the arithmetic of why low interest rates help financial firms in my book "Macroeconomics Redefined". The higher inflation and interest rates of the pre-Volcker era also explain why the financial sector was a relatively small part of the economy at that time.

Higher inflation will encourage the Fed to increase the Fund Rate further. Eventually (my guess is by the end of this year) it will cause a major asset market crash followed by a recession.

"The gas burner manufacturers operate on margins of 5%, the manufacturers of aircraft turbines have margins of 25%. A 10% increase in the price of that steel puts it beyond the reach of kitchen burner manufacturers. For aircraft turbine manufacturers, on the other hand, an increase in the price of steel means more of it is available to them and their consumption increases."

That doesn't make any sense. Why wouldn't the aircraft turbine manufacturers just pay enough to get as much as they need before the price increase? And afterward, if the price goes up, their costs have gone up.

"Why wouldn’t the aircraft turbine manufacturers just pay enough to get as much as they need before the price increase? And afterward, if the price goes up, their costs have gone up."

The analogy is rough and ready. But to answer your question. Why doesn't the aircraft turbine manufacturers pay more? In the case of money, the price is mainly determined by the Fed. Also, it is the financial sector that decides whom to supply money to. At very low interest rates, the returns fetched (in asset markets) are much higher than would be got by lending to real economy companies. At an interest rate of a few percent the returns on asset markets would fall to zero or turn negative. There would be no takers from the financial sector. So there is no alternative but to lend to real economy companies. See the graph on http://www.philipji.com/item/2016-03-07/higher-interest-rates-benefit-the-real-economy

"But the graphs ... show clearly that raising the Fed Funds Rate from very low levels precedes an increase in inflation on numerous occasions."

An alternative explanation is that the Fed folks are the geniuses they would like us to think they are, and correctly identified an increase in inflation before it came to pass, and correctly moved to stem the tide.

"an increase in the price of steel means more of it is available to them and their consumption increases"

Here's a free open source text in economics: https://openstaxcollege.org/textbooks/principles-of-economics. Working through problem sets is key for internalizing the logic of the main points. Basically everything you said is the precise opposite of correct (a spoof?).

Because you're probably not going to go back to that last thread, I wanted to repeat what I said there today:

You've proven that humans couldn't have evolved and the creationists are right. Or, possibly, there's something very wrong with your argument

Is a bubble inflation or is it just a bubble? There seems to be a disagreement here. Can there be inflation if wages aren't rising? Or is there inflation only if wages are rising? If wages aren't rising, how can prices increase other than as the result of supply shocks or bubbles?

Or monopoly pricing. Or imported inflation.

Monopoly Pricing.

High rents a) Impact inflation b) Act as a barrier to entry for firms.

Median rent is up from 23% to 30% of median income in 10 years. That's a LOT of inflation in an era where total inflation is averaging 1%.

PCE inflation is running below 2% in both core and headline, and PCE inflation is the one the Fed is actually targeting.

The Fed rate increase in December may or may not have been a mistake, but if we are merely using current year over year PCE inflation data, then it now looks like a mistake. (I happen to think the PCE inflation rate will rise, which is why I'm not yet convinced that it was a mistake, but the downside risks were certainly greater, so I would not have done it.

So where do you see PCE heading to? 2.5%? Is there any allowance in the Fed's target for some kind of offsetting of years of under shooting with any overshooting? Still feels like a one-sided target.

If the state of "aggregate demand" is what matters, why look at the inflation rate rather than at a measure of that demand, like the NGDP growth rate? Since you have elsewhere expressed your agreement with Scott and David Beckworth and others have written on this matter, the reversion to inflation as a reliable measure of the state of demand seems peculiar.

Comments for this post are closed