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CPI Undershoot Illustrated

Summary:
Typical headline – “U.S. Consumer Price Growth Cools, Smallest Gain in Seven Months“, and “Treasuries Rally After CPI Seen Pushing Off Taper: Markets Wrap” or “Consumer prices climbed more slowly in August, welcome news for the Fed“. Here’re the graphical depictions of the undershoot, first in levels (updating graph from yesterday’s post). Figure 1: CPI (blue), CPI nowcasts (light blue), Bloomberg consensus CPI (light green triangle), Core CPI (red), Core CPI nowcasts (pink), Bloomberg consensus core CPI (inverted brown triangle), all 1982-84=100, on log scale. NBER defined recession dates shaded gray. Source: BLS, Cleveland Fed (as of 9/10), Bloomberg (accessed 9/12), NBER, and author’s calculations. Next, month-on-month annualized inflation (0.10 reads as 10%). Figure 2:

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Typical headline – “U.S. Consumer Price Growth Cools, Smallest Gain in Seven Months“, and “Treasuries Rally After CPI Seen Pushing Off Taper: Markets Wrap” or “Consumer prices climbed more slowly in August, welcome news for the Fed“. Here’re the graphical depictions of the undershoot, first in levels (updating graph from yesterday’s post).

CPI Undershoot Illustrated

Figure 1: CPI (blue), CPI nowcasts (light blue), Bloomberg consensus CPI (light green triangle), Core CPI (red), Core CPI nowcasts (pink), Bloomberg consensus core CPI (inverted brown triangle), all 1982-84=100, on log scale. NBER defined recession dates shaded gray. Source: BLS, Cleveland Fed (as of 9/10), Bloomberg (accessed 9/12), NBER, and author’s calculations.

Next, month-on-month annualized inflation (0.10 reads as 10%).

CPI Undershoot Illustrated

Figure 2: Month-on-month annualized CPI inflation (blue), CPI nowcasts (light blue), Bloomberg consensus CPI (light green triangle), Core CPI (red), Core CPI nowcasts (pink), Bloomberg consensus core CPI (inverted brown triangle), all 1982-84=100, on log scale. NBER defined recession dates shaded gray. Source: BLS, Cleveland Fed (as of 9/10), Bloomberg (accessed 9/12), NBER, and author’s calculations.

CEA decomposes the contributions to August inflation.

CPI Undershoot Illustrated

Vehicle related inflation made essentially no contribution, while pandemic related services deducted (in a mechanical, accounting sense). CEA also provides a time series on pandemic affected services prices.

CPI Undershoot Illustrated

For those worried about a wage-price spiral coming through shelter costs, Owner’s Equivalent Rent (OER) growth remained steady, while Rent of Primary Residence rose 10 bps (monthly basis).

CPI Undershoot Illustrated

The undershoot has implications for nowcasts of August Personal Consumption Expenditure (PCE) deflator inflation. Below is the Cleveland Fed’s as of today:

CPI Undershoot Illustrated

Source: Cleveland Fed, accessed 9/14/2021.

On an annualized basis, nowcasted PCE m/m inflation dropped from 3.75% to 3.59%, while nowcasted core PCE has dropped from 3.60% to 3.41%.

Overall, the new data reinforces the view that the inflation jump is more transitory than permanent (although supply side/supply chain issues may make the rise in inflation more persistent than otherwise).

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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