Inflation: From Let’s Party to Party Pooper!

Chief Economist Eugenio J. Alemán discusses current economic conditions.

Even at the risk of sounding like a parrot by repeating the same thing again and again, we think that it is, once again, appropriate at this time to do so: “One data point doesn’t a trend make.”

But it is clear that markets don’t care about trends, they live in the moment; if they see something they like or don’t like, they just react to it. This is what happened last Friday, when the Bureau of Labor Statistics (BLS) revised the seasonal factors for the Consumer Price Index for the whole of 2023, which showed that December month-on-month inflation was lower than what was originally reported – 0.2% versus an original release of 0.3%. Never mind that the year-over-year rate of inflation did not change at all. That is, even though the rate of inflation for December moved lower – from an originally reported 0.3% to 0.2% – every monthly seasonal factor during the year was revised so, overall, the effect of the revision for the year as a whole was non-existent, which should have been the message received by markets, not just the December revision.

Consumer Price Index Revisions

This was not the first time that inflation numbers have pushed markets from euphoria to dismay and/or disappointment, and we should not dismiss more of these episodes coming our way during the next several months. The Federal Reserve (Fed) Chairman, Jerome Powell, clearly indicated that the Fed was not convinced inflation was guaranteed to continue its disinflationary process toward its 2.0% target. Although he said he was not concerned with an acceleration in inflation, he was concerned with the potential for inflation to remain above the Fed’s target. We wrote about this issue in last week’s Weekly Economics, using the Fed’s preferred Personal Consumption Expenditures (PCE) price index, which, by the way, has been reporting a 2%-handle rate of inflation for several months, unlike the Consumer Price Index (CPI).

But we also mentioned that housing prices within the PCE price index measure were also of great concern for the Fed even though housing prices have a much lower weight in the PCE price index compared to the CPI price index – about 15% versus 33%, respectively.