Why Inflation Around the World Just Won’t Go Away
Roughly a year into their campaign against high inflation, policy makers are some way from being able to declare victory
By Tom Fairless and Paul Hannon, The Wall Street Journal, June 19, 2023
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Across affluent countries, central bankers are sharply lifting inflation forecasts, penciling in further interest-rate increases and warning investors that interest rates will stay high for some time. Some have set aside plans to keep interest rates on hold.
The Federal Reserve last week held interest rates steady but signaled two more increases this year, which would lift U.S. rates to a 22-year high. Price inflation in core services excluding housing, a closely watched gauge of underlying price pressures, “remains elevated and has not shown signs of easing,” the Fed wrote in its semiannual monetary policy report last week…
For now, investors appear to doubt the hawkish tone emanating from central banks. Stock markets are resilient on both sides of the Atlantic, and investors are pricing in interest-rate cuts in the U.S. and Europe next year. That may be a mistake… [end quote]
The markets have already been through ups and downs caused by speculators being shocked that the Fed raised rates as it clearly warned ahead of time.
The Fed’s “Sticky Inflation” gauge has dropped a little but it’s still 6%. The Sticky Price Consumer Price Index (CPI) is calculated from a subset of goods and services included in the CPI that change price relatively infrequently. Median inflation is also high. According to research from the Cleveland Fed, the Median CPI provides a better signal of the inflation trend than either the all-items CPI or the CPI excluding food and energy. According to newer research done at the Cleveland Fed, the Median CPI is even better at PCE inflation in the near and longer term than the core PCE.
As long as these measures of inflation, as well as the Fed’s better-known core PCE inflation index, are higher than the target, the Fed will continue to raise the fed funds rate (though perhaps with “skips” as in June).
Wendy
