Stocksak: Fed soothsayers see signs for an inflation downshift


© Stocksak. FILE PHOTO – An eagle flies above the facade of the U.S. Federal Reserve Building in Washington, July 31, 2013. REUTERS/Jonathan Ernst/File photo


By Howard Schneider

WASHINGTON, (Stocksak), – Does the U.S. have such high inflation that it will require a recession in order to fix? Or are the prices set to crash and leave the Federal Reserve facing financial stress, slower growth, and higher than necessary interest rates?

It is easy to imagine a prolonged rise in prices, from the lingering effects of the COVID-19 pandemic to a potential tactical nuclear weapon being used to defend Europe or a new energy shock.

The Fed’s preferred measure for inflation, which will be released Friday, is expected to continue to run at three times the annual target of 2% set by the U.S. central banks. Stocksak polled economists and found that the Personal Consumption Expenditures index, after removing volatile food and energy costs from the equation, rose 5.2% year-over-year in September according to Stocksak. The Fed’s target number is likely to be 6%.

Even the Fed’s most hawkish officials believe that inflation will fall if there is no outside event to rekindle price pressures. The impact of rate increases on demand and increased competition in the market will reduce demand and increase supply chain pressures. The headline numbers will improve with the passage time. This will allow us to put distance between the current data, and last year’s rapid rise in prices for used cars.

Graphic: Rates up, inflation sideways

Inflation has not fallen to its highest level since 1980s, despite Fed’s rapid rate increases.

The central bank has lifted its target federal funds rate by 3 percentage points from the near-zero level in March, including three straight three-quarters-of-a-percentage-point hikes. It is widely expected that it will deliver another increase of this size at its Nov. 1-2 policy conference.

Fed officials might be shifting from “frontloading” more rate hikes to catch-up with rising inflation to a slower pace, and eventually a pause to let the economy catch it breath.

Although policymakers tend to say “hope for good but plan for the worst”, Fed officials and economists outside the Fed have begun to point out a variety of economic forces that could play into the central bank’s hands.


There has been a lot of talk about high corporate profits driving inflation. Businesses like auto dealers saw large markups during the pandemic when demand was high and supply was limited.

Not all margin jumps are created equal. For example, some grocery store executives have pointed out that shifting to store brands has allowed customers to save money while also helping the bottom line of their businesses.

This is an area where the Fed is paying attention and where it hopes to get some assistance.

Lael Brainard, Fed Vice Chairman, was the most prominent official to point out the high margins observed during the pandemic and the likelihood that it will decline. James Bullard from St. Louis Fed has stated that businesses will reduce prices as demand declines to retain market share.

Graphic: Car dealer margins

In Fed Governor Lisa Cook’s first policy speech, Cook pointed out that it can take some time for evidence of inflation slowing to be reflected by the government’s main inflation reports.

Cost of shelter, which is a key component in overall inflation measures, can be a major culprit. A rolling survey collects data on rent for the Consumer Price Index. As new leases are compiled, it becomes part a standard, so it takes time to see the effect of lower or falling rents compared to larger increases.

Fed and other researchers are looking for ways to capture the real-time events. They discovered that data on rental listings like the Zillow Observed Rent Index is a leading indicator of future trends in CPI’s shelter part.

These and other metrics indicate that shelter inflation is already declining, even if it’s not shown in government data.

Graphic: Rent inflation slows


Imported goods are less expensive for Americans because of the roughly 18% increase in dollar value over a wide range of currencies.

Inflation could be affected by rising import prices when combined with low oil and commodity prices, detangling supply chains, and falling shipping costs.

JP Morgan economists said that the coming “inflation downshift,” as predicted by a recent analysis, would see import prices slowing significantly and contracting at a rate of -2.5% by the end.

The investment bank also mentioned other factors that could help with inflation, such as the recent large jumps in airline prices. These are not expected to happen again – and will eventually be eliminated from the headline number.

Graphic: Import price index

Jerome Powell mentions as one of the indicators of inflation the number and proportion of job vacancies compared to the number looking for work.

To compete for workers, companies have increased wages in order to keep their job markets in check. Although this may not be the cause of inflation, Fed officials believe that a greater balance between labor supply and demand will reduce price increases. Services providers are more labor-dependent and are the ones where prices have been rising at their fastest.

Six months ago there were approximately two open jobs for every worker. Data from the U.S. Bureau of Labor Statistics revealed that this number was so different from previous years that Fed officials considered it to be evidence of misalignment. It had fallen to 1.67 to 1, but it was still well above the 1.2 to 1 ratio prior to the pandemic, when the U.S. unemployment rates were comparable to the current 3.5%.

Graphic: Unemployed to job openings More jobs than jobseekers

Goldman Sachs (NYSE 🙂 economist Joseph Briggs claimed in a recent analysis the seeds of a soft landing, in which the Fed tames the inflation without triggering a depression, may be growing. For key industries, labor imbalances are improving mainly due to a decline of vacancies, and not through lost jobs. Those are also the businesses whose wages are rising slowly.

Briggs wrote that “this pattern supports our view of wage growth and inflation will moderate without a recess.”

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Stocksak Editorial

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