Is inflation coming down in a "clear and convincing" way?

Inflation, excluding food and energy, has cooled some in the past three months through April. That's encouraging, but it ain't good enough.

In April, monthly inflation excluding food and energy was 0.3%. That’s in line with the prior two months. By contrast, core was around 0.5% around the end of the year.

While May and June will be decisive, we are on track for core inflation in the second quarter to step down to around 4% at an annual rate from the 5% pace in the first quarter. (See below through 2022:Q1.) That’s progress.

Is that good enough progress to satisfy the Fed? No, it is not. Not even close.

After getting burned by a similar step down in inflation in the third quarter last year, the Fed has set a higher bar now. Here’s Fed Chair Jay Powell recently:

“We [The Fed] know that this is a time for us to be tightly focused on the path ahead and on getting inflation back down to 2% …

And we have both the tools and the resolve to get inflation back down. And no one should doubt our resolve in doing that …

What we need to see is inflation coming down in a clear and convincing way, and we’re going to keep pushing until we see that.

There’s the test “clear and convincing.” Those are powerful words for Fedspeak.

One quarter would not be enough, especially when storm clouds are brewing for supply chains AGAIN due to China’s “zero Covid” policy. We may desperately want to be done with Covid, but it is not done with us. Moreover, we are in this pandemic together. We cannot control Covid policies in other countries, but they affect us.

Another risk is energy prices that remain sky high due to the war in Ukraine. Core inflation is not immune to energy prices since some businesses will pass those costs through to consumers. Some like airlines have already started to.

Both risks make the Fed—especially after the dashed expectations of transitory last year—wary of viewing some months of encouraging data as on the path down to 2%.

The rest of the post behind the paywall discusses the Fed’s strategy.

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