Signal From Static: Inflation Fears Roar Back (in the Discourse, That Is)

Daniel P Wiener

Chairman

Inflation is rising, but not as measured by consumer or producer prices.

Pundits, and particularly those who misjudged inflation fears on the way up (or now on the way down), are arguing we need a different method for measuring it. It’s as if—because they couldn’t predict inflation accurately in years past—it’s the measure that must be wrong, not the predictions.

Inflation fears peaked shortly after June’s high-water mark of 9.1% (which declined to a 6.5% year-over-year rate by the end of 2022). But it feels as though the noise around inflation is still on the ascent.

Remember “transitory” inflation, the term Federal Reserve policymakers first used in March 2021? Their notion was that rising inflation would reverse quickly without much ado.

Along with many others, I thought the transitory theme was put to rest well before 2021 ended, as inflation rose from 2.6% to 7.0%. Not to mention that it kept rising in five of 2022’s first six months. Yet, in the past week or so, the notion of inflation as transitory has come back into the conversation. The argument is that you just have to look at the individual components of inflation to see which are transitory and which aren’t. What? That’s like saying a beef stew is low calorie if you focus solely on the celery and carrots.

The U.S. Labor Department’s two main measures of consumer inflation are the consumer price index (CPI) and the core consumer price index, which strips out food and energy prices in an effort to gauge inflation without the impact of these two more volatile components. The more recent parsing of the inflation data has also led to calls to focus on something called supercore inflation. Like core, supercore ignores food and energy prices while also stripping out housing, which is similarly volatile.

From where I sit, all the navel gazing on inflation is itself likely to be transitory. Whether the pundits think that transitory inflation elements or supercore prices or something else altogether might tell a more nuanced inflation story, the bottom line is that consumers, investors and even the U.S. government will continue to count on two long-standing measures: The CPI and the PCE (personal consumption expenditures index), which is the Fed’s “preferred” measure. Not some variant.

And right now, both government indexes say inflation is falling and should continue to do so. That’s the headline that matters most.