Another week of data with more signs that we are on a path to lower inflation next year.
Inflation remains above pre-Covid levels; that is a hardship for families. And we have more reasons to be increasingly, cautiously optimistic about inflation slowing more.
This week’s data again showed signs of an improving inflation outlook. My cautious optimism that more relief is coming in the first half of next year is rising. Good.
What new data did we get?
The Producer Price Index continues to step down, except for food.
The price inflation businesses face is moving significantly from very high levels early this year. That’s a promising development for consumer price inflation down the road. Competitive pressures should eventually lead businesses to pass some of those lower prices onto consumers.
Growth in total compensation for workers, which could fuel more consumer demand and inflation, is easing.
Year-over-year, the growth in total compensation has slowed and is now around its pre-Covid level. That should put less upward pressure on demand. It includes the change in all worker compensation forms (wages and salaries, supplements, and employer contributions to employee benefit plans) net of taxes. Less upward pressure on demand makes it easier to cool off inflation.
This excellent guest post from Riccardo Trezzi, a former Fed expert on prices and wages, has much more. He unpacks more wage data, particularly the Average Hourly Earnings, which many mistakenly interpreted as bad news last week.
Gasoline prices continue their steady march down.
Gasoline prices continue to decline. That’s good for American consumers. The change is due to more supply (good) and a worsening global outlook (bad).
And that’s on top of other supply-side disruptions easing. Like producer prices, many of these will likely take time to reach consumers. It is coming from many directions.
Inflation expectations remain in the range of pre-Covid.
Long-run inflation expectations in early December held at 3.0 percent—within the range in the past several years. Inflation remains high, albeit slowing down, and there are no signs that households expect inflation to be persistently higher. None.
It’s time for inflation hawks to explain why these data don’t make them any more optimistic.
Again, the inflation hawks must tell us why their story remains so dire after the data during the past two weeks. See my post after last week:
The past two weeks have been promising, on balance, for inflation to step down further in the coming months. Of course, that’s no guarantee, and we should be cautious. And we must engage with the data and what we know now and start our forecasts there. Note next week is CPI and Fed Week. Rest up this weekend.
And remember: Good news is good news. The past two weeks have been good.
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