Beastflation

From inflation run amok to disinflation

If the Federal Reserve has any hopes of sticking a “Soft Landing,” as discussed in the last Macrosight post, the rate of inflation needs to keep falling. More to the point, inflation needs to fall and the U.S. economy needs to avoid a recession. Both outcomes are still uncertain. For this post let’s focus on the former.

Inflation? Disinflation? or Deflation?

Why are the chattering-classes hopeful of a Soft Landing? One reason is the rate of inflation, as measured by the CPI, has fallen 15 out of the last 18 months, from a peak of 8.9 percent in June of 2022 to 3.3 percent for December 2023. Yet, 3.3 percent is still above 2 percent, the value the Federal Reserve targets for the inflation rate. And while it appears the Fed expects inflation to continue to fall in 2024 (as indicated by the forecasts from their most recent meeting), it is still possible that inflation will remain stubbornly high, and perhaps motivate the Fed to raise its target interest rate again in 2024.

In light of recent the recent inflation numbers, it is useful to clarify different terms related to inflation, such as the following:

• Inflation: The rate is positive over a specific period of time (typically monthly). On average the prices of goods and services are rising.

• Disinflation: The inflation rate is positive, but, the positive rate is getting lower and lower over consecutive months. On average prices are still rising, but at a slower rate. The decline of the CPI rate of inflation from 8.9 to 3.3 percent over 18 months is a disinflation.

• Deflation: The inflation rate is negative. On average prices are falling. At first glance, this may seem preferable, but ultimately, for a macroeconomy, deflation is bad news (more on this in a future post).

Okay, given the recent disinflation, how optimistic should we be about inflation falling further from 3.3 down to 2 percent, without triggering a recession? To answer this, let’s check out the recent history of inflation.

Beastflation

Figure 1 displays the CPI rate of inflation, measured as the percent change from a year ago, from March of 2010 through December of 2023. The section in yellow at the very end of the timeline highlights the last seven months, over which inflation averaged 3.3 percent. Comparing the yellow part of the graph to what came just before—highlighted in red and circled—is why many are cautiously breathing a sigh of relief.

The red section of the graph is what Macrosight likes to call our “Beastflation” period, since this rapid increase in the general price level was primarily wrought, according to Macrosight, by the Hungry Beast’s response to the Covid-19 pandemic. Or, rather,

• Beastflation: The inflation rate is positive, but, the positive rate is increasing rapidly resulting in higher and higher rates of inflation over consecutive months. Generally caused by historically high consumer spending, 5 trillion dollars worth of stimulus money, supply-chain constraints, and the Fed misreading the situation—not necessarily in that order.

The Beastflation section of Figure 1 spanned 26 months from April 2021 through May of 2023. Over those months, inflation averaged 6.6 percent. 6.6 percent is more than three times the average rate of inflation over the ten years prior to Covid-19, over which time inflation averaged only 1.8 percent (emphasized on the graph in blue).

On the heels of the pre-Covid period, the green section of the graph marks the thirteen months running from March 2020 through March 2021, over which inflation averaged an even more tepid 1.2 percent. By March of 2021, however, inflation had crept up to 2.6 percent (following a value of 1.7 in February of 2021). Then, in April of 2021, it leapt to 4.1 percent. Thereafter Beastflation was off and running.

Disinflation

Back to the question at hand—where does the last 18 months of disinflation leave us, optimistic or not? Macrosight is mostly on the optimistic side of things for the reason stated at the outset of this post. The CPI rate of inflation has come down for 15 out of the last 18 months and appears to have stabilized, with the rate staying under 4 percent for the past six months. The ongoing disinflation suggests that expectations have adjusted to the Fed’s effort to slow the economy. If so, it is reasonable to expect disinflation to continue in 2024.¹

1. An additional ray of hope is that the Fed’s preferred price index, the PCE, equaled 2.6 percent in November of this past year (measured as the change from a year ago). According to the Fed’s forecasts they expect the average rate of PCE inflation for 2023 to equal 2.8, and to come down further in 2024 to finish the year at 2.4. By those numbers, we are closer to the Fed’s target of 2 percent than the 3.3 CPI number suggests.