The Atlanta Fed´s “inflation project” provides us with alternative measures of CPI inflation. It separates flexible prices from sticky prices and, in addition, subdivides both the flexible and sticky components into their core measures. It also provides the sticky measures excluding shelter inflation.
Yesterday, the St Louis Fed tweeted the following chart, indicating that headline sticky annualized CPI inflation had reached 3.5% (Oh my God!) in September.
In a recent post, Kevin Erdman arrives at a very sensible conclusion:
This week, expectations of a Fed rate hike have moved back from the December meeting toward the March meeting. That would be helpful, given that outside of the rent inflation caused by the housing supply depression inflation continues to be at a 50 year low.
In the meantime, considering the decade long depression-level behavior of housing starts, calls for monetary contraction because of inflation that is largely the product of rising rents are indefensible.
My point is that a target that has “multiple faces” is a dangerous target indeed!
In addition, presenting the multiple-faced target in a noisy format (annualized rates), is “criminal”.
Let´s see some examples.
Superimposing the headline sticky year on year (YoY) rate to the headline sticky annualized CPI inflation tweeted by the St Louis Fed, we get a very different picture of trend inflation.
And comparing the sticky YoY Core-CPI with the sticky YoY Core CPI-Ex shelter we see the reason for Kevin´s conclusion.
Note: House Starts: