Inflation Indicators Healthy but Still on the Rise
Jacob Hess
March 17, 2021
The talk of the street right now is inflation whether it be Main Street or Wall Street. Chairman Jerome Powell made many references to it in his recent monetary policy testimonies in front of Congress just before Treasury yields began to move on Wall Street. That has sparked interest in the topic across the US as consumers and business owners begin to worry about rising costs. Google Trends shows inflation searches near a 5-year high after peaking in the first week of March.
Indicators are starting to show signs of inflation picking up as well with market expectations of inflation shifting as well. The movement is relative to near-term economic conditions as indicators continue to recover from a deflationary COVID-19 environment that has required central banks to overload the money supply to keep the economy afloat. However, concerns that a recovery could overheat into something more dangerous are rising especially with central banks doubling down on accommodative monetary policy. These assurances of low interest rates come despite a $1.9 trillion stimulus bill and many optimistic GDP estimates for the US and developed economies.
The following index is an attempt to measure how inflation indicators are moving relative to the last 4 years. The series are indexed against the 4-year median value (data starts in 2017) to represent their level compared to relatively normal conditions. The indicators are a few of many measures of prices and costs and were not selected for any particular reason other than that they are general measures of inflation and/or inflation expectations. Not every series has values for February and March (the most recent complete reading is January) so January values are used. The series are as follows:
- 5-Year Treasury - 5-Year TIPS (Constant Maturity)
- CPI: All Items for the US
- PPI: All Commodities
- Current Prices Paid (Texas Fed PMI)
- Current Prices Paid (New York Fed PMI)
- Current Prices Paid (Philadelphia Fed PMI)
- PCE Price Index (Ex Food and Energy)
- Bloomberg Commodity Index
- Atlanta Fed Business Inflation Expectations
The indicator has trended strongly upward since the pandemic began at almost a constant pace with most of the movement generated by PPI and the Fed PMI Prices Paid measures. This suggests that most of the cost inflation is at the firm level and hasn't come through to the consumers yet. This seems to be confirmed by CPI and PCE Price Index 2021 reported values reported below the 4-year median. The trend of low consumer prices relative to producer prices is not likely to persist if longer-term inflation expectations remain elevated. Nevertheless, the reflation that has occurred so far appears healthy and does not seem "too hot" compared to long-term trends.
The ideal path would be a deceleration of price growth in 2021 Q2 with that growth leveling out to flat in the second half of the year. However, that may not be possible with the current state of monetary policy, and the market is beginning to recognize that. The burning question is if the Fed and other central banks are willing to admit it as well. Once again, the stage is set for a battle over policy rate normalization as the pandemic finally passes.
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