Disinflation is Transitory

Another day, another higher-than-expected inflation report.  Today’s eye-catcher was the ISM Prices Paid report for February, coming in at 51.3, well above both expectations of 46.5 and last month’s 44.5.  In and of itself, this number wouldn’t be enough to change the narrative about inflation.  ISM Prices Paid is considered a less-important inflation measure than CPI, PPI or PCE.  The problem is that today’s three-letter acronym fits with the recent pattern of prices rising faster than expected, let alone hoped.

Let’s recap the past month of inflation data.  We started February with great enthusiasm, thanks to Chairman Powell’s repeated use of the term “disinflation” in the post-FOMC press conference on the first of the month.  His claim seemed to be vindicated the next morning, when fourth-quarter unit labor costs rose by 1.1%, below the 1.5% estimate, and the third-quarter was revised down to 2.0% from 2.4%.  That proved to be a potent combination for equity bulls, who launched a sizable rally fueled somewhat by “zero-dated” or “0DTE” options

That proved to be the peak for both the equity markets for the month and for enthusiasm about inflation.  The next day’s payrolls report was most notable for an unexpectedly large boost in hiring and historically low unemployment, but we also had a modest upward revision in December’s month-over-month hourly wage gains. 

CPI came out on the 14^th, and it was not viewed as a Valentine’s Day present.  The January month-on-month numbers were as expected, but December’s headline number was revised up by 0.2% and the core by 0.1%.  Two days later, the PPI report was relatively eye-popping.  On a month-over-month basis, January’s headline PPI of 0.7% exceeded expectations by 0.3%, and December was revised up by another 0.3%.  The core of 0.5% was 0.2% above expectations, and there was a 0.2% bump to the prior month.  These put a huge hole in the disinflation narrative.

On the 23^rd, a reading of fourth-quarter Core PCE came in at 4.3% above the 3.9% that was both expected and the prior quarter’s number.  The monthly rise in the Core PCE Deflator, widely believed to be the Fed’s preferred inflation measure, came in at 0.6%, 0.1% above expectations, and December was revised up to 0.2% from 0.1%.  This completed a seeming superfecta of inflationary reports that came in above expectations and above prior readings – all of which were revised higher.

If that didn’t put the final nail in the “disinflation” coffin for now, on the 22^nd we learned that the term never appeared in the meeting’s minutes.  We’re unlikely to ever know for sure whether the Chairman was sincere in his belief that inflation was indeed slowing or if it was merely reflective of his inherent nature as “Goldilocks in a suit”.  But his comments about disinflation during February’s FOMC presser seemed to age about as well as his “neutral” comments during July’s. 

Yet even though we appear to scoff at an obviously inappropriate declaration about disinflation, it is important to remember that there will be a time when we do want, need, and likely get disinflation.  It is the second derivative of prices.  Inflation is the change in prices over a period of time.  If that rate of growth slows, it becomes disinflation.  Disinflation is a necessary, but not sufficient condition for winning the war against inflation.  We want prices to rise at a much slower rate than they are now, so disinflation will need to occur for that to happen.  We should all welcome the time when disinflation becomes a lasting feature of our economy.  But for now, the disinflation that we might have seen late last year appears to have been transitory.