Are we slaying inflation?
Posted on December 16, 2022

The inflation data for November came out on Tuesday: inflation was lower than last month and lower than expected. The recent data tracks to less than an annual 3% rate of inflation. That sounds like good news to me, but stocks fell about 4% over the next two days. I can’t figure that out. This post shows the recent changes in inflation for three measures of inflation: I’ve added the index of Personal Consumption Expenditures to the two measures of inflation that I’ve showed in previous posts.


After the announcement on inflation on Tuesday, the Fed raised interest rates on Wednesday by 0.50% and signalled another increase in January. US stocks fell a total 4% on Wednesday and Thursday. Maybe the market judges further actions to lower inflation aren’t needed and will risk recession. I’d argue that the Fed must keep the pressure on to get enough months of low inflation – low Core inflaition in particular – to conclude that they will hit their target over a 12-month period. What do you think?


== Three measures of inflation ==


The two most widely-reported measures of inflation are Seasonally-adjusted inflation and Core inflation.


Seasonally-adjusted inflation was +0.10% for the month and has totaled 1.0% over the last five months: that translates to an annual rate of ~2.5%.



Core inflation which excludes volatile energy and food components was +0.20% for the month; inflation in the past two months has totaled less than 0.50%: that translates to an annual rate of ~3%, but the last five months translate to ~5% annual rate.



I add a graph for the monthly change in Personal Consumption Expenditures (PCE). This measure is one that the Federal Reserve Board favors. October is the most recent month available. November’s result will be available on January 1. The last four months track to an annual inflation rate of 2.5%.



 == History of 12-month inflation ==


The trend in 12-month inflation measured by CPI-U – a measure that is not seasonally adjusted – shows that inflation peaked in June at 9.1% and has declined to 7.1%.




Conclusion: The monthly rate of inflation in November was ~0.20%. This lower than last month and lower than expected. The annual rate of inflation, based on the recent months of low inflation – ranging from two to five months depending on the measure for inflation – is about 2.5% to 3.0%. This is higher than the Federal Reserve’s target of 2% inflation, but this is welcome news: we are on a trend that is much lower than the 9.1% 12-month rate we hit last June.

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