The Truth About Inflation

Charlie Toole, CFA, CFP^®

Director of Portfolio Management

It has been over a year since Federal Reserve Chair Jerome Powell retired the word “transitory” from his characterization of inflation.

Since then, Powell and the Fed have acted aggressively to hike interest rates in hopes of slowing demand, ideally leading to inflation decreasing.

On Tuesday, the Bureau of Labor Statistics released the February CPI report—a common measure of inflation that tracks the change in prices for certain goods and services.

As mentioned above, the headline year-over-year number was 6.0% in February, down from 6.4% in January and the high of 9.1% in June 2022.

So, on the surface, it looks like the Fed’s policy is working. But we wanted to peer past the headline number to get a better look at the underlying trend.

We found that inflation has decelerated more rapidly in the short term. Over the most recent six-month period, the annualized inflation rate was 4.3%. This is substantially lower than the headline 6.0% annual rate (due to the exclusion of the higher monthly changes to CPI in the early part of 2022).

By this gauge, inflation is closer to the Fed’s target of 2.0% than one might think by simply looking at the number in financial headlines—though there is still a way to go, even with inflation decreasing.

You can be sure the Fed is well aware of this trend. The question is how much more the central bank believes it needs to do to reach its target level for inflation.

We’ll know more next Wednesday, when the bank’s Federal Open Market Committee is due to make its latest policy statement. At present, based on action in the fed funds futures market, traders’ expectations are for a 25-basis-point hike, though a number of investors are betting the Fed will make no change.

We view either of those moves as confirmation that with inflation decreasing, it is a less significant threat to economic growth than it was just a few months ago.