CPI Undershoot Illustrated

Typical headline – “U.S. Consumer Price Growth Cools, Smallest Gain in Seven Months“, and “Treasuries Rally After CPI Seen Pushing Off Taper: Markets Wrap” or “Consumer prices climbed more slowly in August, welcome news for the Fed“. Here’re the graphical depictions of the undershoot, first in levels (updating graph from yesterday’s post).

Figure 1: CPI (blue), CPI nowcasts (light blue), Bloomberg consensus CPI (light green triangle), Core CPI (red), Core CPI nowcasts (pink), Bloomberg consensus core CPI (inverted brown triangle), all 1982-84=100, on log scale. NBER defined recession dates shaded gray. Source: BLS, Cleveland Fed (as of 9/10), Bloomberg (accessed 9/12), NBER, and author’s calculations.

Next, month-on-month annualized inflation (0.10 reads as 10%).

Figure 2: Month-on-month annualized CPI inflation (blue), CPI nowcasts (light blue), Bloomberg consensus CPI (light green triangle), Core CPI (red), Core CPI nowcasts (pink), Bloomberg consensus core CPI (inverted brown triangle), all 1982-84=100, on log scale. NBER defined recession dates shaded gray. Source: BLS, Cleveland Fed (as of 9/10), Bloomberg (accessed 9/12), NBER, and author’s calculations.

CEA decomposes the contributions to August inflation.

Vehicle related inflation made essentially no contribution, while pandemic related services deducted (in a mechanical, accounting sense). CEA also provides a time series on pandemic affected services prices.

For those worried about a wage-price spiral coming through shelter costs, Owner’s Equivalent Rent (OER) growth remained steady, while Rent of Primary Residence rose 10 bps (monthly basis).

The undershoot has implications for nowcasts of August Personal Consumption Expenditure (PCE) deflator inflation. Below is the Cleveland Fed’s as of today:

Source: Cleveland Fed, accessed 9/14/2021.

On an annualized basis, nowcasted PCE m/m inflation dropped from 3.75% to 3.59%, while nowcasted core PCE has dropped from 3.60% to 3.41%.

Overall, the new data reinforces the view that the inflation jump is more transitory than permanent (although supply side/supply chain issues may make the rise in inflation more persistent than otherwise).

 

12 thoughts on “CPI Undershoot Illustrated

    1. David S

      Thanks a lot for including that link to that Cochrane/Hasset post. This ain’t your 1970’s block party. Although I think Delta has contributed most of that bend in CPI we’re not out of the woods on a lot of supply chain issues. I’m terrified of having a car accident that would require me to purchase a new or used vehicle, and that’s a problem that will persist for the next 18 months. At least a 2×4 costs about $3—just don’t try to buy windows, copper wire, appliances, engineered lumber, or HVAC equipment.

      Reply
      1. Moses Herzog

        The one from March is even more alarmist. Notice the subtitle Cuckrant was going to point to later if he had even made it to the parking lot of the ballpark on his prophecy:
        “The central bank is headed back to the Seventies — a rerun that no one should want.”
        https://www.nationalreview.com/2021/03/does-the-feds-monetary-policy-threaten-inflation-contains-spoilers/

        Johnny Cuckrant is the same as Kudlow and Stephen Moore, a 100% fraud who knows what his carnival going audience will click on. They enjoy the bearded lady mostly.

        All apologies to old school carnivals—which I actually have some sentimental love for. The worst of them were more honest than Cuckrant.

        Reply
      2. Moses Herzog

        The one from March is even more alarmist. Notice the subtitle Cuckrant was going to point to later if he had even made it to the parking lot of the ballpark on his prophecy:
        “The central bank is headed back to the Seventies — a rerun that no one should want.”
        https://www.nationalreview.com/2021/03/does-the-feds-monetary-policy-threaten-inflation-contains-spoilers/

        Johnny Cuckrant is the same as Kudlow and Stephen Moore, a 100% fraud who knows what his carnival going audience will click on. They enjoy the bearded lady mostly.

        All apologies to old school carnivals—which I actually have some sentimental love for. The worst of them were more honest than Cuckrant.

        Reply
  1. macroduck

    Vehicles and parts disappeared (near zero change) and the Atlanta Fed’s core flexible price index fell in the month — essentially the same fact expressed two ways.

    Sticky price inflation measures? The slowed, but only ever so slightly (because they are sticky). Which is why one should look at them.

    Meanwhile, we have been treated to comments recently about how he Fed is going to face BIB, BIG problems over housing costs, so watch out! Well, not this month.

    Reply
    1. Moses Herzog

      I’m so glad it wasn’t me who said this last part you mentioned, I have enough things to answer for on this blog. Did I tell you the nursing home wing no longer invites me over for Bingo on Friday nights?? Hey, I got a commodities markets hot tip for you. Blue horseshoe loves Anacott Steel and oil prices will be anywhere between $40 to $100. Don’t tell anyone about that last part or the SEC regulators will be hot on your trail.

      Reply
      1. Moses Herzog

        Also. oil could go above $100 between now and December 31. So, like, you’re not a complete idiot if you said that would happen. Or if you knew of someone else who said that on this blog. It’s not a big deal to say things like that. I’m just trying to be helpful and supportive.

        Reply
  2. macroduck

    Off topic —

    China’s retail sales were up just 2.5% y/y in August, the smallest gain so far this year, following an 8.5% y/y gain in July. Haven’t found a figure for the August level (July was 3.49 trillion) and year-ago was far from smooth, so I don’t know whether there as an outright decline in retail sales in August vs July. Not good, either way.

    Reply
    1. Moses Herzog

      I gotta feeling any numbers we see from China for at least the next month are gonna be under consensus (i.e. disappointing). I guess that’s an obvious statement at this point. Still interesting to watch.

      Reply
  3. Ivan

    Is it inevitable that temporary inflation (increase in prices) will be followed by a temporary deflation event – as prices get down to where they were supposed to be?

    Reply
    1. macroduck

      Nope. Often, a one-time price increase is not reversed, but also does not get repeated. A one-time step-up in price followed by a period of statiiic prices or slow price increase. Deflation is damaging and resisted by wise policymakers.

      Reply

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