INSIGHTS

“PEAK” INFLATION NOT CONFIRMED

Ed Peters
|
May 25, 2022

When the Consumer Price Index (CPI) data was released a couple of weeks ago, there was a sentiment of relief. Headline CPI and Core CPI measures had dropped a bit on year-over-year basis, leading many investors and market pundits to hope that we’re close to “peak inflation.” That is, the highest inflation rate has maxed out, and it will be downhill from here.

Unfortunately, the Fed also uses other measures of inflation shown to better measure the trend in inflation, and these did not agree. Sticky Price CPI, Sticky Price Core CPI, Median CPI and Trimmed Mean CPI are all measures that are thought to better capture the long-term trends in inflation. None of these measures declined in April. They all, in fact, increased at about the same rate they did the months before. The only alternative measure that declined was Flexible Price CPI, which is designed to measure the current economy rather than future trends.

So what are these other measures? The sticky price measures use components of CPI that change infrequently. When they do change, it is likely due to increased underlying costs to the production of those goods and services. Median CPI, as the name suggests, uses the median to exclude those components of CPI which have the largest changes up or down. This is similar to what “core” CPI is supposed to do by excluding food and energy, which are often considered the most volatile CPI components. Likewise, the trimmed mean approach removes 8% of the highest and 8% of lowest changing components when calculating CPI.

All of these alternative methods are attempts to capture the underlying trend in inflation by reducing month-to-month noise. Unfortunately, none of them indicated that we have reached “peak” inflation, which would require several months of declining inflation to confirm a trend, anyway. So it is far too early by any measure to say that inflation is moderating. This would imply that the Fed has a long way to go before its policies will be effective. We can still hope we have hit the peak inflation, but right now it remains a hope.

Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss.
© First Quadrant, LLC, 2022. Intended for Institutional and Qualified Eligible Persons Use Only. The views expressed are the views of First Quadrant, LLC, only as of the date shown and are subject to change without notice based on market and other conditions. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice, recommendation, or solicitation of any particular security, strategy or investment product. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of domicile. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

Related Posts