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Inflation in May

Month-on-month vs year-on-year, and headline, chained, sticky price, 16% trimmed, and (for April) PCE deflator. First, remember the distinction between…

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This article was originally published by EconBrowser

Month-on-month vs year-on-year, and headline, chained, sticky price, 16% trimmed, and (for April) PCE deflator.

First, remember the distinction between m/m (which is more informative regarding contemporaneous conditions), and y/y (which is more backward looking).

Figure 1: Month-on-month inflation of headline CPI (blue), year-on-year of headline CPI (teal), month-on-month inflation of core CPI (dark red), year-on-year of core CPI (pink). NBER defined recession dates (peak-to-trough) shaded gray. Dashed red line at Russian expanded invasion of Ukraine. Source: BLS, NBER, and author’s calculations.

Note that while y/y headline hit a high (since 1981), m/m is down (though not as much as one would’ve hoped). On the other hand, m/m core inflation rose, which bodes ill trend inflation.

Second, different estimates of month-on month headline inflation, shown in Figure 2, shows some hopeful signs.

Figure 2: Month-on-month inflation of CPI (blue), chained CPI (brown), 16% trimmed CPI inflation (red), sticky price CPI inflation (green), personal consumption expenditure deflator inflation (black), all in decimal form (i.e., 0.05 means 5%).  Chained CPI seasonally adjusted using geometric Census X13 (brown). NBER defined recession dates (peak-to-trough) shaded gray. Source: BLS, BEA, NBER, and author’s calculations.

The Cleveland Fed’s nowcast for May m/m annualized PCE inflation as of 6/11 is 8.9%, rebounding from the actual preliminary 3.0% in April.

Over the last month, trimmed and sticky price CPI inflation has been less that headline. Trimmed < headline suggests price increases are concentrated in certain rapidly rising categories. Sticky < headline suggests flexible prices are doing the bulk of the price changes.

Third, for core measures, the rise in May is not good news (even if the rate is lower than in April of last year):

Figure 3: Month-on-month inflation of core CPI (blue), chained core CPI (brown), sticky price core CPI inflation (green), personal consumption expenditure core deflator inflation (black), all in decimal form (i.e., 0.05 means 5%).  Chained CPI seasonally adjusted using geometric Census X13 (brown). NBER defined recession dates (peak-to-trough) shaded gray. Source: BLS, BEA, NBER, and author’s calculations.

The Cleveland Fed nowcast for May core PCE inflation is 5.7%, up from preliminary 4.2% in April.

A good rundown on the implications of the CPI release is provided by this Brookings piece (including views of Furman, Edelberg, and Wolfers). See CEA twitter thread as well. The contribution of housing costs is notable, since this factor is likely to be persistent:

Together these housing cost measures contributed about 24 basis points to monthly core CPI inflation, versus 11 basis points on average pre-pandemic, reflecting challenges in the housing market.

The 5 year inflation breakeven rose from 3.08% to 3.15%, still below the March 25th level of 3.59%. The 5 year 5 year forward breakeven stayed essentially constant (dropping 3 bps).


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