The figure is slightly misleading because it’s a measure of year-on-year change in CPI, rather than being a point-in-time measurement, as many assume it to be.
June’s one month CPI increase was 0.2%, coming on the heels of May at 0.1%. The annual rates for May and June respectively are thus 1.2% and 2.5% respectively - significantly lower than the year on year rate would suggest. If we assume the true point in time rate is between 1.2 and 2.5%, then the economy has rapidly cooled.
The strongly inverted yield curve reflects this slowdown and predicts - with some degree of confidence - that the Fed will have to drop rates soon because the slowdown is leading us towards a recession. I find it interesting that the S&P is close to its height prior to the start of last year’s bear market even though the yield curve suggests extreme caution is warranted.
A recession would imply that the interest rate policy has worked. But it would also imply reduced corporate profits and growth, both of which feed into fundamental measures of equity value. This is a nerve wracking time to be invested in stocks.
> recession would imply that the interest rate policy has worked
No, it would not. Price levels and the economy are fundamentally related, but they can and do move separately. Stagflation is one such condition. The Fed is targeting its opposite. Plunging America into a recession would be a clear policy failure.
No views on the stock market here. Just pointing out that rising wages and thus rising spending, with rising production permitting low inflation and a Fed calmly and confidently lowering rates over years while unemployment stays low is achievable.
The main financial drag on the LEI change has since softened [1], as have the new orders component of the ISM index [2] and consumer confidence [3], the main non-financial ones. In line with the trend of June portending better months ahead than did May.
Given we're attempting a novel monetary maneuver--essentially, the opposite of stagflation--I'd widen my error bars on macroeconomic heuristics.
It is incredible to me how few people understand this. Particularly people with finance backgrounds that should know better. The June 2022 CPI showed an increase of over 1.2% (just in June!), equivalent to about 13% inflation at a yearly rate. The last few months have all been in the 0.1%-0.4% range.
Even if you just assume that June 2022 is roughly in-line with March/April/May, that means the June 2022 1.2% falls off the moving average and is replaced with something in the 0.1%-0.4% range. So of course YoY inflation decreases from 4% to 3%. It's just a moving average. Moving averages and YoY numbers make sense to cancel out seasonality and noisy monthly numbers when things are regular. But if there's say, a massive spike in inflation due to supply chain issues, well it's going to take a full year for that spike to disappear from the yearly moving average.
An aggregate figure which can’t ever describe inflation as experienced by individuals is only SLIGHTLY misleading?
It’s like saying we’re all 32 years old or whatever the average age is. You might resoundingly refute the idea that as a 16 year old or a 96 year old that you’re 32. You’d look aghast as someone gaslights you with “yes we all have different ages thats obvious but its the average that matters, so you’re 32 like everyone else”.
But but that’s not the point of ascribing a number to inflation i hear you cry, it’s still a useful construct because it can be compared across countries, it can be compared over time… the model itself can be adjusted to suit particular analysis - RPI, RPI-H, CPI, CPI-H, etc.
… to which i can’t help but yawn. The discipline of macro economics has more in common with astrology than science. The answer to any identified weakness is always “more macro economics”.
Micro economics is often useful though.
Micro = come up with a hypothesis, test it and see if it works.
Macro = tell bamboozling campfire stories with the purpose of claiming power and money away from others without having to fight them for it.
> like saying we’re all 32 years old or whatever the average age is
Yes? This [1] is an important metric if you're running a country?
> yes we all have different ages thats obvious but its the average that matters, so you’re 32 like everyone else
This isn't a parable about a bad metric. It's one about not reading a good metric wrong. The fool in your story misunderstands how averaging works; that doesn't make every average bad or misleading.
> that’s not the point of ascribing a number to inflation i hear you cry, it’s still a useful construct because it can be compared across countries
No, it's useful in its proper context. There are a number of metrics because there are, unsurprisingly, a number of questions people ask about prices. PCE is good if you're setting nationwide monetary policy. It's irrelevant to 99% of the contexts it's quoted in.
I think you misunderstand. The GP comment isn't talking about inflation in general being misleading, but the monthly year-over-year change.
For your analogy, it's perfectly reasonable to say a population's average age is 32. But it gets muddy when you start comparing the rate of change of the rate of change, so if the age was 31 last month people start extrapolating that we'll all age 12 years in the next 12 months.
June’s one month CPI increase was 0.2%, coming on the heels of May at 0.1%. The annual rates for May and June respectively are thus 1.2% and 2.5% respectively - significantly lower than the year on year rate would suggest. If we assume the true point in time rate is between 1.2 and 2.5%, then the economy has rapidly cooled.
The strongly inverted yield curve reflects this slowdown and predicts - with some degree of confidence - that the Fed will have to drop rates soon because the slowdown is leading us towards a recession. I find it interesting that the S&P is close to its height prior to the start of last year’s bear market even though the yield curve suggests extreme caution is warranted.
A recession would imply that the interest rate policy has worked. But it would also imply reduced corporate profits and growth, both of which feed into fundamental measures of equity value. This is a nerve wracking time to be invested in stocks.