Fed-Vision, by goodstead

A Totally Revolutionary Way to See Inflation Exactly As the Federal Reserve Sees It. Only from goodstead

Zürichopenair, CC BY-SA 3.0 <https://creativecommons.org/licenses/by-sa/3.0>, via Wikimedia Commons
The innovation just keeps coming from the folks over at goodstead

Below, we show what the Fed sees when it looks at inflation rates. The blue line is the Consumer Price Index (CPI), the red dashed line is Core CPI (CPI less food and energy), the Personal Consumption Expenditures (PCE) is the green dotted line, and the Trimmed Mean PCE (a statistically robust method of measuring core inflation) is the purple dash-dotted line. The CPI measures register against the percent change scale on the left side of the graph, and the PCE measures register against the percent change scale on the right. Values are given since January 1st, 2020. The gray shaded area represents last year's recession.

As you can see from the percent change in both, the rate of price change is trending downward, both for headline inflation as well as for core inflation, and using both CPI and PCE as measures of inflation. While levels of inflation are high relative to long term averages, their upward momentum has been arrested, probably due to the twain factors of decreased demand and relaxed supply pressures.

In the chart above, we show data going back to the last recession, the 2007-08 Global Financial Crisis. As you can see, the percent change in CPI plummeted, then accelerated coming out of the GFC. The same can be seen for the COVID-19 recession. Both of these recessions were marked by contractions in demand, which caused prices to fall. The subsequent increases in inflation show a sudden increase in demand which take a bit to be met by increased supply before moderating.


The Fed places more weight on the PCE measures of inflation for several reasons which I will summarize by saying that it is more dynamic and comprehensive a measure than CPI. Additionally, CPI has a bias toward higher inflation than does the PCE, as you can see in the chart above that depicts longer-term inflation rates. So, when everyone in the financial media, and especially the conservative media, is freaking out about high and persistent inflation, remember to take a look at the inflation measure they are using before rendering judgment.


Digging into the numbers themselves a bit, we can see where the decrease in the price for All items came from. Prices for New vehicles, as well as for Used cars and trucks fell--and in the case of Used vehicles, a lot--as did transportation. Shelter fell a bit, which is important for goodstead's Members, although food costs didn't fall as much as would be welcome. Whatever the case, this is a good demonstration of what the Fed is talking about when it talks about "transitory".

Table A. Percent changes in CPI for All Urban Consumers (CPI-U): U.S. city average (BLS)

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