US inflation: too low for Fed tightening

Following the Hilsenrath article on tapering, there has been a lot of talk about the possibility that the Fed’s next move is not only up — but soon.

Some influential voices, such as the SF Fed’s Williams, have put forward the case for an early move (see his most recent speech) — which is a fair indication that the core of the FOMC might be starting to move.

I still count myself among the sceptics — mostly because inflation is so low. In a blog post, Hilsenrath pointed to a few data quirks that might ease the Fed’s mind.

In my view, these are just the sort of data quirks that statistical exclusion measures such as trimmed mean and weighted medians handle well.

gp_3mUSinfl

On these measures, inflation looks low: the 3m AR of trimmed mean CPI was ~1.4% to April, and the 3m ave of trimmed mean PCE was ~1.4% to March (the 3m AR of the weighted median CPI was ~1.9% to April).

gp_6mUSinfl

The research I am aware of says that the 6m AR is the best balance between (timely) signal and noise: on this basis the core measures of CPI were ~1.6% (trimmed mean) and ~2.1% (weighted median) for the 6m to April; the trimmed mean PCE was ~1.3% for the 6m to March.

gp_12mUSinfl

The above chart shows through the year measures: for the year to April, the trimmed mean CPI was ~1.6%, with weighted median CPI at 2.1%. For the year to March, trimmed mean PCE was ~1.4%y/y.

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7 Responses to US inflation: too low for Fed tightening

  1. nottrampis says:

    This is great ( you will be up there with Tim Duy very soon) but you really do need a life on the week-end

  2. ssec says:

    With asset prices now growing (both shares and housing), there’s little risk of not meeting inflation targets in the medium term.

  3. nottrampis says:

    SSEC, you seem to forget the US had a housing bubble without any great effect on the inflation rate.

    • ssec says:

      Rates went up to almost 6% during the “bubble”, but should have gone even higher and faster (not according to your theory of short-term growth policies). Housing is recovering in the US and that will take the unemployment rate down, shares are at record high and show no signs of correcting, the fed mission is accomplished. The focus is now how to slowly exit all of this in the most efficient way to avoid creating the next monetary bubble already.

      • ssec says:

        BTW, they have been targeting asset prices and inflation expectations all the way since the GFC, not PCE or CPI.

  4. nottrampis says:

    SSEC you answered the wrong question

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