Things Are Getting Sticky. Prices Always Have Been.

There is no shortage of opinions regarding inflation at the moment. Thankfully, the Consumer Price Index (CPI) seems to have finally peaked, but much debate remains about how long it will take to reach the Fed’s long-term target of 2%. Even if we exclude food and energy, which tend to exacerbate the volatility of price movements and therefore can obscure the long-term impact on consumers, the year-over-year increase in prices hovered around 6% for the entirety of 2022. These are the highest CPI increases the economy has seen since 1982.

With such high headline CPI reports, it is natural for investors and consumers to wonder when prices might come back down. Gas prices steadily declined for most of the fourth quarter, and with at least some grain shipments now leaving Ukraine, there may be some relief at the grocery store soon. However, the CPI ex food and energy does not capture the reversal of these specific short-term price spikes. And the less volatile nature of an inflation measure without food and energy gives us the opportunity to derive some interesting insights.

In addition, if we are going to assess the potential for recent price increases to reverse, we would be much better served by looking at month-over-month values to see the actual sequential change in consumer prices. And since the last time we saw inflation at the high rates we are seeing today was in the late 1970s to early 1980s, we decided to start there to answer a simple question: How quick and how prolonged were the CPI month-over-month declines to reverse at least some of the high inflation witnessed between 1974 and 1982?

The answer: “#N/A”. Well, actually, the answer is that CPI declined a total of ~0.3% for just two consecutive months in November and December of 1982 (Figure 1). Two months. -0.3%. Not even enough to reverse the price increases from the two prior months of September and October 1982, let alone any of the CPI increases that took place during the eight years prior to that. Moreover, in the last 65 years, CPI has declined month-over-month only seven times. Of those seven times, only twice have there been consecutive monthly declines. In every instance of a CPI decline in consecutive months, the price index reached its previous high in six months or less, and in that case (first half of 2010), the extent of that decline was -0.10% in a single month, followed by several flat months before prices began increasing again.

Figure 1: CPI ex Food & Energy declined on a month-over-month basis just seven times in the last 65 years and only twice for consecutive months. (Source: Bloomberg Finance, LP, September 30, 2022)

The bottom line: It seems prices do not go back down once they go up. Even in the most extreme upward price scenarios in history, prices were sticky. And this does feel somewhat alarming, especially given that the Federal Reserve kept their target Fed Funds rate between 4.75% and 20% in that 1974-1982 timeframe. Yes, 20%.