PCE inflation settled down a little bit in September but core inflation was up:
Why the sudden spike in core inflation? As usual, it was mostly in core services, which were up at an annualized rate of 5.0%. Overall, this is not good news on the inflation front.
On a year-over-year basis, the headline PCE rate was up 3.4% and core PCE was up 3.7%.
In looking at the link, the average core rate for the last five months is .22 which is a rate of 2.6% core inflation rate which is where it should be. One should never just look at a one month data point. Also, unlike goods, where inflation is cumulative and change frequently upwards month to month, services are a bit more static.
What are the main costs in core services?
Wages, I assume.
Housing and healthcare are about 25% a piece. Food services/restaurants and financial services are about 25% combined.
Core PCE leaves in Food services/ restaurants while excluding Food goods/ groceries.
If you combine the recent GDP growth number with the current core inflation figure, it’s hard to conclude inflation is stable and no further actions from the Fed are needed.
What would you consider 'stable inflation'? This term is doing all the work here and it seems at odds with any traditional understanding of the words 'stable' and 'inflation' given the slow and regular descent in the rate of inflation over the last year+.
Using your own definition of 'stable inflation', why is it hard to conclude it has reached that status?
Perhaps some sense of proportion is in order.
Here are rates from 1981 to 1992
(Reagan Bush years):
10.3, 6.2, 3.2, 4.3, 3.6, 1.9, 3.6, 4.1, 4.8, 5.4, 4.2, 3.0
Is that stable ? By Reagan's second term were we hearing constant warnings about inflation ? Did it cost him a second term ? When Reagan left office inflation was 4.7 percent.
So, I'm not sure what "stable inflation" rates mean. I think after the financial debacle of 2008 we grew accustomed to unusually low rates of inflation which has set the bar rather low. Average inflation rates from 2009 to 2020:
-.4, 1.6, 3.2, 2.1, 1.5, 1.6, .1, 1.3, 2.1. 2.4, 1.8, 1.2
Then after yet another cataclysmic event inflation briefly soared, though never as high as Reagan's first year in office. At 3.6 or 3.7 percent Reagan would have been crowing about "morning in America" . With unemployment AND inflation under 4 percent just a couple years after a once in a century global pandemic that killed well over a million Americans I think Biden deserves at least some credit, especailly when you compare us to the rest of the world. .
I keep waiting for Kevin to acknowledge he has been way too optimistic about inflation returning to pre-Covid levels, and way too pessimistic about how quickly the Fed would strangle the economy. Today could have been that day. But not yet.
That being said, let's not read too much into one month of data. Q3 Core PCE inflation ran at an annualized rate of 2.544%. Q2 Core PCE inflation ran at 3.113%. Q1 was at 4.918%. We're making tremendous progress!
...but Kevin has been embarrassingly (wrong + overconfident) and he should acknowledge as much!
What was Kevins prediction for when prices would return to pre-covid levels?
Probably best to use a prediction from mid to late 2022.
Well, in December 2022, he thought that inflation had already disappeared. https://jabberwocking.com/inflation-has-practically-disappeared/
Sorry I missed your comment on Friday, I intend to answer your question later today. I have meetings throughout the day, so I won't be able to get to it quickly, but I'll start off by verifying whether you agree he was embarassingly wrong about how quickly the Fed would strangle the economy?
https://jabberwocking.com/two-recessions-are-barreling-toward-us-next-year/
Second, why would I have to limit myself to mid-to-late 2022? Kevin was talking about how inflation was transitory and would fix itself long before then? But since you requested, I'll start looking in that time frame. I'm sure I'll find something.
July 5, 2022: https://jabberwocking.com/the-fed-is-gunning-for-a-completely-unnecessary-recession/
In the caption to the chart on consumer expectations, Kevin says he is "with the 25th percentile, although perhaps not quite *that* optimistic." The 25th percentile is a 5-10 year inflation rate of something like 0.6%. That strongly suggests an expectation that inflation will not stay above 2% through the end of 2023 - 0.6% inflation for 5 years means 3% cumulative price increase over 5 years, and of course prices have already gone up more than that since July 2022.
July 21, 2022: https://jabberwocking.com/is-high-inflation-here-to-stay-lets-hear-from-everybody/
Kevin says:
"For the record, I think Team Transitory figured that inflation would come down by the end of 2021. At this point, it looks like either (a) they were utterly, catastrophically wrong, or (b) they were about a year too optimistic. I would like everyone on either side of this debate to tell us where they stand now. For the record, I'm on Team "We Were a Wee Bit Too Optimistic.""
Kevin certainly seems to be predicting that inflation would come down by December 2022.
July 26, 2022: https://jabberwocking.com/did-donald-luskin-get-it-right-about-inflation-today/
Not a prediction per se (in fact he discusses the probable flaws with someone else's prediction methodology), but I think it is quite clear that Kevin agrees with Luskin's prediction even if he can't conscionably cite his methods. Luskin claims core CPI will be back to 2% by mid 2023.
August 16, 2022: https://jabberwocking.com/single-family-housing-starts-are-plummeting/
"It's hard to see how core inflation can remain high under these conditions."
September 16, 2022: https://jabberwocking.com/we-really-really-dont-need-a-huge-recession/
"In other words, if we do nothing more we'll still probably get core PCE down to 2-3% by Christmas. Maybe lower. Who knows?"
For the record, annualized Core PCE was 4.749% in December 2022; for 2022Q4 it was 4.150%. And the Fed did not do nothing in the interim.
I could keep going (and I may!) but this seems strong enough for now. I included the links I started with as I was going through Kevin's inflation posts starting July 2022, because while anyone of them could be quibbled with, they clearly point towards an author who was confident inflation was already coming down without Fed action and would be under control by the end of the year.
He explicitly came out and said as much in that last post, so I think I've made my point for now.
The last thing I'll say is that the predictions about inflation and about recession can't be separated - the reason Kevin's predictions about inflation are important is that he was arguing against Fed rate hikes, and he was arguing against Fed rate hikes because he was convinced they would cause a recession while not helping inflation. The two topics are really one topic. The fact that we haven't had a recession long after Kevin said we would is enough to merit reflection and acknowledgement on his part, but we also haven't seen prices stabilize even though he said they would do so without additional action from the Fed.
Hmm, thanks. Thats obviously not a prediction. He didnt say 'inflation has disappeared' either. In that post he links to himself stating that inflation is variable from month to month, the 6-12 month delay in housing costs artificially overstates current inflation and we should see yearly rates continue to decline. If thats a prediction, it was a pretty good one.
It wasnt embarrassingly wrong to state that both PCE and CPI had fallen at year end....that was a fact. That we have seen 9+ more months of this trend of stable, slowly falling rates seems to support the general tone of that post.
Interesting observations, thanks for those.
Kevin didn't merely say the rates had fallen, though; he said "the core rate is down to 2%," and he characterized that not as one month's momentary relief, but as inflation having come back to normal. "Terrific news," and it happened "all on its own." That's optimism! But the call was a little bit hasty. https://jabberwocking.com/inflation-has-practically-disappeared/
On the other hand, the current post is overly pessimistic, also because of focusing on a single month. The past six-month span has seen the lowest inflation rate of any such period during Biden's term.
Well ok, but he didnt say any of the words you put in his mouth. He never said that inflation was back to normal and every month in the future would be sub-2%.
He actually did say it was only one month and that 12 month rates would take longer to catch up if you prefer looking only at 12 month rates. He was correctly optimistic, rates were falling and the fears of long lasting or runaway inflation appeared to be wrong....and he was right.
Not only is this not an embarrassingly bad prediction, this prediction was correct as 12 month rates have fallen since he made that post.
I just dont get it. Thank you though, have a great day.