Inflation: data says going down, down, down

Looking at the chart below.

It took about 18 months for inflation to rise from its prior baseline to the peak near Jun 2022. A dummy model requiring no extra thinking might say it would similarly take about 18 months for inflation to decline from its Jun 2022 peak and return to its prior baseline. If so, then we are about halfway back to baseline with maybe 9 months to go (again, a dummy model, but no worse than anything else I’ve seen).

Year-over-year (12 month trailing) inflation peaked around Jun 2022. Over the next few months, Apr, May, Jun, Jul, Aug, we will be lapping the 1-year anniversary from Jun 2022, so year-over-year comparisons will be relative to the peak inflation months near Jun 2022, which will provide an even higher hurdle for prices to exceed in 2023 in order for inflation metrics not to moderate.

And of course, there are many forces putting downward pressure on inflation: the economy is slowing, higher interest rates and related banking stress are slowing credit growth, etc.

Over the last 6 months, from Sep 2022 to Mar 2023, the Fed’s preferred inflation measure, PCE inflation, went from 124.154 to 126.373, an increase of 1.78% which annualizes to 3.6%.

With the Fed funds rate already at 5%, another 0.25% rate hike is not going to move the needle either way. The Fed should pause soon, unless they really think the Fed funds rate needs to go much higher, like 6% or more, and I don’t think very many people believe much higher rates are warranted.

And the Fed’s messaging and posture certainly isn’t indicating the need to move rates another 1% or more higher. Just ask Fed Chair Powell:
p. 4. “…we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation…”

Doesn’t sound like a policy determined to drive rates much higher.


I no longer drive but I do glance at fuel prices when I walk past gas stations. Fuel prices in Portugal are falling.

The Captain

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Gasoline is down about 10% since the recent peak in mid-April.

Good to read. We need the industrial build out as does the rest of the global economy.

What’s interesting is, if you expand the RBOB chart out to 1 year, that in the next few months we will lap the giant peak in prices, which should help to pull down the year-over-year inflation numbers (maybe people will then say, “oh, the Fed rate changes are now lowering inflation”, lol).

Although it’s clear from the chart that prices (in this example) came down a long time ago, people still constantly refer to the year-over-year numbers even though it takes, well, a year, to see how prices have changed when looking at the data that way.

For that reason, I prefer something like a trailing 3 or 6 month change, or at least look at the trend in monthly change of the year-over-year numbers.


It’ll definitely help … for the June number (by about 1% overall since gasoline has a weight of about 3%, assuming $4 in '22 and $2.50 in '23) but after that it won’t help much at all because Jul and Aug '22 already showed a rapid drop in gasoline prices, and that drop pretty much remained till today. So due to gasoline, the YOY numbers will show big decline in June, a medium decline in Jul, and then no more declines unless gasoline drops further in the coming months.

This is precisely why many people also look at CPI without the very volatile things like gasoline.


Maybe we’re looking for inflation in all the wrong places.


The problem is we left the disinflationary period behind a couple of years ago.

We have a background noise of inflation for years to come. This means interest rates and taxes need to be modestly higher than they were for the last x number of years.

But those tax receipts can be put to much better uses now. Expect the velocity of money to rise.

There’s reason to believe there is some disinflation coming. Recession should mean lower oil prices. And reduced cost pressures on many transportation issues.

Wages tend to be sticky, but employees may be more flexible when they see jobs threatened by recession.

Yes, a mixed bag but not hopeless.


disinflation short term but the constant background noise during this period is inflation. It is easy to ward off with greater industrial production levels in the US and Mexico.

The latest CPI figures came out Thursday and inflation shows no signs of stopping its steady march lower.

Two ideas that haven’t gotten traction in the data: stagflation, wage-price spiral.

Inflation over the last 6 months was 2.55% annualized, not too scary.

Jan 2023 300.536
Jul 2023 304.348
6 month % change 1.27%
6 month % change, annualized 2.55%


Different indexes of inflation are all trending down: headline, ex food and energy, sticky - the below chart shows the Fed’s preferred inflation measure, PCE inflation, along with the sticky inflation index.

Over the last 6 months using the latest available PCE inflation data (Feb to Aug 2023), inflation was 2.6%.

PCE Inflation Index Feb 2023 119.386
PCE Inflation Index Aug 2023 120.953
6 month change % 1.31%
6 month change annualized % 2.64%

An inflation rate of 2.6% is not high and is not far from the Fed’s 2% target.

The sticky inflation index measures prices which, by definition, change more slowly than the overall (headline) inflation price index. The sticky index does not measure whether overall inflation is sticky.

The sticky index peaked with about a 6 month lag behind the headline index in the chart below and overall inflation declined faster than the sticky index, so when measured by the steepness of this decline, headline inflation was not as sticky as the sticky index (as we might normally expect based on how these indexes are defined).

I doubt the Fed would be surprised or concerned that the sticky inflation index is above 2% given that this index changes slowly by definition and the other inflation indexes have been trending down for 12 to 15 months or so and over the last 6 months PCE inflation is 2.64%.

Because the sticky index changes slowly, by definition it is more correlated with past values. And by this same definition it is more correlated with future values. This autocorrelation makes it “predictive” by this statistical mechanism, but I’d be curious as to how this relates to inflation expectations or some more economically fundamental predictive power concerning how markets set prices.


It is too early to predict this chart. There can be another FED hike. Your post is excellent. Puts a very very different odds that the FED won’t hike rates.

If the FED were done hiking then the yield in the chart would stabilize. The main focus is the inflation premium falling off from the bond yields. We might answer yes.

You really wrote a heck of a good post. Thanks

I am not sure if the valuations matter to bond yields or that these charts are at all retrievable till summer 2024. There could be a bounce but the damage is now built in.

Another story is the money supply. That is the heart of it.

Note the change in the MA on this chart. It is slowing.

As the MAs slow we get back to a healthier money supply.
But there is a cost to assets up front.


The Atlanta Fed puts out what they call the Sticky-Price CPI, both with and without food and energy. Here is a graph of the without index:


Inflation, by all different measures, CPI, PPI, PCE, wage growth, continues its trend down and back to typical levels - chart below. CPI and PCE (the Fed’s preferred measure) inflation are converging to very similar readings.

The Treasury market, which has a forward looking expectation of inflation called breakeven rates, expects 2.23% inflation over the next 5 years.

Over the last 6 months using the latest available CPI inflation data (Apr to Oct 2023), inflation was 3.13%.

CPI Inflation Index Apr 2023 302.918
CPI Inflation Index Oct 2023 307.619
6 month change % 1.55%
6 month change annualized % 3.13%


What was the forward looking expectation of inflation in Jan '20? Jul '20? Jan '21? Jul '21? etc. Is there a chart of forward looking expectation that can be overlaid with actual inflation to see how well it tracks?

This Treasury presentation describes the TBI (Treasury Breakeven Inflation) calculation and shows a number of curves. For example:


The Fed’s preferred inflation measure, PCE Inflation, was released this week for October. Inflation continues to decline and look very mild. PCE, CPI, and PPI inflation are very correlated with each other, as the chart below shows (so the PCE Inflation change just released mimics the CPI Inflation change released earlier this month). Interestingly, CPI and PCE Inflation rates over the trailing 12 months have converged to similar rates.

Over the last 6 months using the latest available PCE inflation data (Apr to Oct 2023), inflation was 2.5%. PCE Inflation excluding food and energy was similar.

The benchmark 10-year Treasury yield has similarly declined recently, from a peak of about 5% on Oct 19 to about 4.4% now.

Will the 10-year Treasury yield reach 5% again in 2024?

PCE Inflation Index Apr 2023 119.893
PCE Inflation Index Oct 2023 121.385
6 month change % 1.24%
6 month change annualized % 2.50%


Aside from the hokey pokey numbers.

I do not think the FED will raise rates next year. Yep I am changing my tune.

My mind has changed on that.

I think the foreclosures in the commercial real estate market will shrink the money supply so the FED does not need to raise rates.