Maestronomics revisited

US media are somewhat disconcerted today by the news that "the Fed's favourite inflation gauge", the core personal consumption expenditure (PCE) deflator, ticked higher in April. In the distant past, the Fed mostly focused on CPI data, the same as the rest of the world, but the "maestro" Alan Greenspan put a stop to that. He engaged in a round of index shopping in an effort to find a measure that would allow him to do what he wanted to do, which was to keep rates low. First he settled on the Employment Cost Index (ECI), then when that started to misbehave he moved on to the even more obscure core PCE deflator. 

Would it be useful to do a comparison of the recent behaviour of these indices? Let's give it a go.

Headline CPI rose 4.9 percent in the year to April 2023, while core CPI (i.e. excluding food and energy) rose 5.5 percent. The cyclical peak for headline CPI was reached in June 2022, when it rose 9.1 percent from a year earlier.  

The ECI is a quarterly number, not monthly. For Q1/2023 it stood 4.8 percent higher than ayear earlier, compared to a rise of 5.1 percent in the year to Q4/2022.

The Core PCE deflator rose 4.7 percent in the year to April 2023, up from 4.6 percent in March but down from a reading of 5.2 percent in September 2022. It is worth noting that the monthly increase in the index for April, at 0.4 percent, is exactly in line with the average monthly increase seen over the past year. The all-items PCE deflator rose 4.4 percent in April, up from 4.2 percent in March. The annual increase in this measure was 5.4 percent at the start of 2023 and over 6 percent as recently as September 2022. 

Just a couple of observations on these numbers. First, ECI and the PCE deflators never peaked as high as the CPI figures, which is of course exactly why Greenspan glommed onto them in the first place.  Second, the relatively tame performance of the ECI, despite very tight labour markets, suggests that there is no real threat of a wage-price spiral*. Third, the fact that core measures for both CPI and the PCE deflator are lower than the all-items measures must be of particular concern for Fed policymakers. Food and fuel prices may grab the headlines, but it will not be possible to get inflation back to the target level unless more widespread price pressures are brought under control.  

Today's data may well help convince the Fed that it has more work to do, even though there is scant evidence that its rate hikes have had much to do with the decline in inflation over the past year. 

* It also suggests there is no validity to the Philips curve approach to policy, but I think I have flogged that dead nag enough.