Disinflation Is Alive and Well, but the Fed’s Job Is Not Over

Chief Economist Eugenio J. Alemán discusses current economic conditions.

We hear and read daily analysis on how inflation is coming down and that the Federal Reserve (Fed) has beaten inflation. This is probably very close to the truth from an economics point of view. However, from an individual consumer point of view, the truth is much different. For the majority of consumers everything is more expensive today than before the COVID-19 pandemic and getting more expensive. It is true that many consumers have received increases in wages and salaries over the last several years, which have helped them catch up to inflation, but salary and wage increases normally lag behind the rate of inflation.

It is also true that a measure of inflation followed by Fed officials lately, the seasonally adjusted rate for ‘all items less food, shelter, and energy’ or what has been called ‘super core’ fell below 2.0% on a year-over- year basis. However, as we have been saying for more than a year, when inflation is relatively low and stable, year-over-year comparisons are typically good measures. However, when inflation is coming from a relatively high rate, such a measure does not reflect the actual effects for consumers. That is, when inflation has been relatively high, our preferred measure is the 12-month moving average rather than the year-over- year measure. And if we look at the 12-month moving average for super core, it was still at 3.6% in September while the overall or headline rate was at 5.1% and the core CPI was at 5.3%.

Again, year-over-year rates as well as other measures like three-months annualized rates to check on the direction of inflation are important analysts’ tools. However, these measures are not important for consumers as they continue to suffer the cumulative effects of inflation on their purchasing power. At the same time, and as we have been arguing for a while, the Fed’s target for inflation is 2.0% and we are still a long way from achieving the target.

As the table below shows, in order to achieve the Fed’s inflation target, we need to see monthly inflation not surpassing 0.15% for a sustained period of time and we are not close to those rates, even if the direction of inflation, as many continue to point out, is heading the right way.

Consumer Price Index

Core Consumer Price Index