A Warning Sign on Inflation

The first post I put up on this site argued that base effects in inflation signaled its cooling through the middle of 2024. I think that I can argue it was quite successful. While over the six month timeline I wrote about, the annualized rate of CPI inflation edged up, the core CPI rate fell by more than 60 basis points, the PCE rate fell by around 15, and the most important measure, the core PCE rate fell by more than 50.

Today, however, a plot of a 24 month base effects curve looks a lot more like it did when the current inflation took off than it did in November of 2024.

Things are far from as clear as they were in May of 2021 or November of 2023. Especially with what is the most important measure of inflation: Core PCE.

Looking at the slope coefficients, as flawed a measure as they are (see my earlier post for more detail), shows a similar story. Base effects are not forecasting another pickup in inflation, but neither are they showing any more free disinflation.

It will therefore be up to policymakers to choose their tools to get on target. I have a reasonable amount of faith in the Fed, but in fiscal policymakers, I have none.