Inflation isn’t slowing — it’s just stalled at more than twice what it should be
Tiana Lowe Doescher
Video Embed
While headline consumer price inflation indeed dropped from 5% to 4.9% on an annual basis from March to April, that’s about the only good news in the latest CPI report released by the Bureau of Labor Statistics.
Headline CPI rose by 0.4% in April, four times the increase in March, thanks to an uptick in gas prices. But the real warning for the Federal Reserve came in the core CPI print, which indicates that, after a significant slowdown in the inflation rate late last year, the central bank’s progress has stalled.
WHITE HOUSE CELEBRATES FALLING INFLATION WHILE GOP POINTS TO NEGATIVE REAL WAGES
For every month of the year, core CPI — that is, the Fed’s preferred CPI measure that excludes the volatile categories of food and energy — has risen by 0.4%, except for March, when core CPI came in at 0.5%. Core CPI over the last three months was 5.1% at an annualized rate, compared to 4.8% over the last six.
Breaking down the CPI basket into historically “sticky” prices versus more flexible prices puts the picture in starker terms. Headline sticky-price CPI inflation has risen by 6.5% over the past year, whereas flexible CPI inflation has risen by just 1.9%. Core sticky CPI has risen by 6.3% over the past 12 months as opposed to the mere 1.4% in core flexible prices. Considering that sticky-price items comprise 70% of the total CPI basket — flexible prices obviously constitute the other 30% — the sheer magnitude of sticky-price CPI bodes poorly for our future projections of inflation.
In other words: We’ve conquered the easy one-third of the inflation problem, but that final 5.5% of core CPI inflation will be a lot more difficult to bring down to the Fed’s target of 2%.
The Fed removed its forward guidance from its last announcement of the federal funds rate hike to 5.25%. While it is fully possible that Fed chief Jerome Powell uses decent news on the headline inflation front to pause on the next rate hike until he sees the data in the summer, the stagnation of inflation’s slowdown means there’s no remote chance of a “pivot.” Whatever Treasury futures markets say, core inflation settling at 5% for the year gives the Fed no reason to slash rates.