US Disinflation Looks Set To Continue
US consumer inflation at the headline level in August fell to a 2.5% annual rate -- the slowest pace since early 2021, the US Labor Department reports. But the core rate of CPI – considered a better measure of the trend – held steady at 3.2%, raising concerns that inflation will remain a challenge for the Federal Reserve and the economy in the near term. But a closer look at various metrics suggest that disinflation will continue in the months ahead.
One way to measure the overall inflation bias is monitoring the spread for headline and core CPI on a rolling one-year basis. History suggests this measure provides a rough estimate of the strength or weakness of disinflation. When the spread is negative, as it currently is and has been for a year-and-a-half, that’s a sign that the disinflationary bias is relatively strong. On that basis, disinflation momentum remains robust.
Supporting evidence that inflation is expected to remain relatively contained and will hold steady if not trend lower: modest inflation expectations. The Cleveland Fed’s inflation expectations model, for instance, continues to reflect easing estimates for future expectations. The median estimate ticked down to 2.2% for September, the fourth straight monthly decline.
Another measure of inflation expectations also tends to indicate a disinflationary bias via five-year inflation expectations based on two models. One model uses the 5-year/5-year forward expectation rate, as calculated by the St. Louis Fed. The second model uses the implied market forecast according to the 5-year nominal Treasury yield less its inflation-indexed counterpart. The average of these two models continues to forecast an inflation outlook in the low-2% range, which is modestly below the current pace of consumer inflation.
Finally, consider how a set of alternative inflation indicators stack up. The logic here is that the standard consumer price indexes published by the Labor Dept. may be flawed in some degree. Indeed, any one measure of inflation reflects a particular set of pros and cons. Expanding the data set to a range of indicators offers the opportunity to strengthen the analytics and calculate a closer approximation of the true inflation rate. On that basis, estimating the average change in CPI via a broader set of inflation benchmarks arguably provides a clearer measure of the trend, which continues to reflect ongoing disinflation.
