Disinflation is upon us. That's what the data is saying. That's what Jay Powell is saying. That's what mainstream media is reporting.
The only people who aren't feeling the effect of disinflation are, well, everybody who need to actually buy stuff and pay the bills.
The problem is that disinflation is not deflation. Disinflation means everything is still getting more expensive. It is just getting more expensive less fast...
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Inflation slowdown: snail pace edition
I don't think anyone is really complaining about disinflation. Obviously that's better than inflation accelerating.
But just to make sure we are on the same page let's just remember what we are talking about:
Inflation measures the rate at which prices change year on year. A positive rate means prices increase (inflation). A negative rate means prices decrease (deflation).
When we talk about inflation accelerating or decelerating (disinflation) we are focusing on the rate of change of the rate of change of prices. That’s twice removed from the real thing.
Historically speaking deflation (prices actually going down) is rare. How rare? VERY rare.
Take the inflation rate calculated each month as the year on year change in the CPI since 1948. Over that period the US has only experienced deflation 5% of the time. Needless to say those periods of deflation have not been enough to offset what happens the rest of the time.
Said differently whatever major price increases we have been through in the past couple of years, don't expect things to ever come back to pre-pandemic price levels.
So from a practical perspective it is good to remember that disinflation or not, prices continue to increase at more than twice the rate the Federal Reserve would like to see.
With a 5%+ inflation rate, price increases sting enough for the consumer that the Fed has to manage a political issue on top of an economics problem. That's why it is unlikely they'll pivot before their hand is forced by external factors.
But let's look at the latest inflation data.
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