Inflation’s Terrible, Horrible, No Good, Very Bad Day

Not Good. Not Good at All

How bad was the August US inflation report? Let me count the ways. It’s a while since a macroeconomic release has come as such a nasty surprise, but on balance the extremely negative market reaction to the numbers was justified; they’re awful.

The headline inflation rate fell very slightly, as had been made more or less inevitable by falling oil prices. But a range of underlying inflation measures actually increased to fresh multi-decade highs. This is far more important to the Federal Reserve, which has limited power to affect oil prices, and also to the rest of us.

The following chart shows:

  • The Cleveland Fed’s “trimmed mean” inflation rate, which excludes the components that have moved the most in each direction and takes the average of the rest;
  • The Cleveland Fed’s “median” inflation rate, which simply takes the median rate from all the components in the consumer price index;
  • The Atlanta Fed’s “sticky” price inflation rate, which tracks goods and services whose prices cannot easily be changed;
  • The classic “core” measure that excludes food and energy from the headline CPI, to omit categories over which monetary policy has least control; and
  • The Services Excluding Energy Services indicator, which gauges inflation in the cost of services.

All of these measures rose. All except the core inflation measure, which rose but remains below its peak from March this year, are at fresh highs for this cycle, and at their highest in decades. A year ago, the fact that these measures remained largely under control was a key point of evidence for those who believed inflation was transitory. Now, they suggest it could be very much more long-lived: