Khanchit Khirisutchalual
By Jack Janasiewicz, CFA® – Garrett Melson, CFA®
As US inflation persists in 2022 at levels not seen since the 1980s, the Natixis Investment Managers US Inflation Tracker captures the trends that provide context in today’s economy. There may be some relief in sight as inflation has declined for the fifth month in a row.
The Fed’s Labor Market Tightness Measuring Stick
While much of Federal Reserve Board Chair Powell’s recent speech at the Brookings Institution was in line with the rhetoric we’ve come to expect over the past few months, he did acknowledge progress on the inflation fight. More importantly, he also provided increased clarity on the measures guiding policy decisions. Powell specifically mentioned the inflation components that the Board is closely watching:
- Durable goods
- Shelter
- Core services ex-shelter (supercore services)
Core services are considered to be a function of labor market tightness, and the strength of the labor market is the key risk to the inflation outlook. So far so good – supercore services are trending softer.
Supercore Services Price Inflation Is Declining (12/31/17-11/30/22)
Source: Natixis Investment Managers Solutions, Bloomberg. Supercore Services is Consumer Service Inflation less Energy Services less Rent of Primary Residence less Owners’ Equivalent Rent. Core Goods is Consumer Price Inflation less food and commodities.
Disinflation Becoming More Broad-Based
It’s not just that the November Consumer Price Inflation print was softer, but that the trends of disinflation within the line items of the basket were broad-based. Looking at one of the Federal Reserve Bank of Cleveland’s alternative measures for inflation – Trimmed Mean CPI – we get a sense of how pervasive those disinflation trends are.
Clipping off the inflation outliers, we see that the average level of inflation across the basket is dropping precipitously. A few one-offs may skew the headline number higher, but the underlying trend is lower.
Cleveland Trimmed Mean Consumer Price Inflation Trending Lower (12/31/12-11/30/22)
Source: Natixis Investment Managers Solutions, Bloomberg. Trimmed Mean CPI is the Federal Reserve Bank of Cleveland’s 16% Trimmed Mean Consumer Price Index which excludes 8% of the CPI components with the highest and lowest one-month price changes.
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