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Last week, there was a brief ‘inflation scare’ in US markets, caused by the release of the Consumer Price Index (CPI) data. The chart below shows the annual rate of change for the core measure (blue line), which increased from the December level of 3.2%. This resides above the US Federal Reserve’s target level of 2.0% and has shown little improvement since the middle of last year. The disinflation journey looks like it has stalled.
The chart also shows a different measure of inflation, the Personal Consumption Expenditures (PCE) core index (green line). The Federal Reserve values this measure more because it is less affected by imputed housing costs, which are mostly just estimates. This measure is closer to the Federal Reserve’s target level, and it is expected to decline at the next reading, going in the opposite direction to the CPI reading.
A lower reading would be welcome, but we must also recognise that core PCE inflation has not moved much since the middle of last year and could be getting stuck. This reinforces the message from last week’s chart of the week: that the Federal Reserve has moved to a hold strategy regarding rate cuts. Indeed, if we do not see evidence of disinflation, we could be at the end of the interest rate-cutting cycle in the US.
