Inflation didn’t slow as much as economists thought late last year
Tiana Lowe
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The main takeaway from the latest GDP report from the Bureau of Economic Analysis is that the economy grew more slowly during the last quarter of 2022 than economists expected. But perhaps more important is the BEA’s concession that inflation was not slowing down as much at the end of last year as experts assumed it was.
Core PCE, the Fed’s preferred inflation measure that excludes the volatile categories of food and energy, actually rose from 4.3% in the third quarter of last year to 4.4.% during the fourth. That’s only down from 5% core PCE inflation for the year. Compare that to headline PCE for the quarter came in at 3.7% versus PCE inflation for the entire year was 6.3%, more than thrice the Fed’s 2% benchmark.
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Markets, of course, have rallied upon the news. While past inflation that went unanticipated isn’t necessarily forward guidance, it does bode poorly for the accuracy of our future estimates.
The collective amnesia from Manhattan financiers to the Fed has meant their estimates, hopes, and errors have constantly skewed away from the risk of inflation since the Great Recession, which of course was itself caused by the Fed keeping rates too low for too long. Just as Wall Street and Washington tried to convince us that inflation was transitory by the end of 2021, too many were beginning to beat the same drum by the end of 2022.
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Will the Fed cower to investor expectations that it pause hiking rates after the collapse of Silicon Valley bank? If Friday’s PCE report for February comes in, again, far too hot, probably not. But both the Fed and the financial industry were adamant that inflation was slowing down somewhat by the end of last year, an assertion that looks a lot less backed by the data in hindsight.