THAT WOULD BE NICE: The Inflation Tide Appears To Be Turning.

Alas, there is little reason to expect the Fed will continue to deliver a monthly core inflation rate of 0.1 percent. Although its average inflation target would seem to require reducing the gap between core PCEPI and the pre-existing 2 percent growth path, Fed officials do not intend to do that. Instead, they intend to see prices grow 2 percent per year on average beginning sometime after 2024. In the meantime, they project inflation will remain high, though not as high as it has been over the last year, with monthly core inflation around 0.2 percent and the gap between core PCEPI and the 2 percent growth path plotted from January 2020 slowly increasing in 2023 and 2024.

Of course, it is also possible that the Fed has not yet gotten a handle on inflation. It is hard to have much confidence with only one month’s worth of data. Perhaps the low core inflation rate observed in July is just a blip. It wouldn’t be the first time a one-month core PCEPI inflation reading prompted undue optimism. For example, the monthly core PCEPI inflation rate fell from 0.4 percent in August 2021 to 0.2 percent in September 2021. It then hit 0.5 percent for four consecutive months. Many incorrectly predicted that inflation would fall following the September 2021 reading when, in fact, it was about to surge.

Still, the most recent inflation data provides some scope for optimism. After a long delay, the Fed finally seems to be bringing inflation down. It doesn’t plan to bring inflation down quickly, nor to offset the high inflation we’ve experienced over the last year. But at least it does not intend to let prices continue to grow as fast as they have.

So the inflation tide isn’t really turning, it’s just moderated a bit.