The "Data-Dependent" Fed and the Data
Interpreting the mixed signals across the economy, with a focus on inflation, jobs, and market pricing.
Federal Reserve officials are set to raise short-term interest rates by another 0.75 percentage point this week. They will also likely provide guidance about further interest rate increases to come.
Like the rest of us, Fed officials are trying to make decisions based on what they think will happen, but they only have information about what has already happened. Imagination and flexibility are required to fill in the gaps and compensate for the inevitable errors of interpretation.
What follows is my summary of the data I am looking at and how it relates to the Fed’s stated objectives.
Consumer Price Inflation: Little Comfort from Weaker Headline Numbers
Last week’s Consumer Price Index (CPI) looked good on the surface, with prices rising just 0.12% from July to August on a seasonally-adjusted basis. From September 2021 through June 2022, prices rose about 0.7% each month on average. But the slowdown mostly reflected the dissipation of temporary factors associated with the pandemic and Russia’s most recent invasion of Ukraine (red bars below). Falling energy prices alone shaved 0.41 percentage point off the overall inflation rate in July and 0.43 percentage point off in August.
That’s welcome news, but it also means that inflation caused by everything else (the blue bars) is getting worse. Recent price increases attributable solely to these other categories would generate yearly inflation of about 5.5%-6%.
Much of that is due to rents. The CPI measure of rents is rising 0.7% a month, or 9% annually. Rents are up about 6.5% over the past 12 months, which is broadly consistent with the high-quality (but lagged) measures of total wage growth.
Much of the rent increases showing up in the CPI today (and likely into next year) reflect changes in market dynamics from last year that likely won’t repeat. The question is what happens once the one-off impact of those past rent increases stops showing up in the data.