US INFLATION
Ahead of Wednesday's CPI report, the Dallas Fed has published a helpful primer on how to interpret the various seasonal effects seen in inflation at the start of the year, addressing residual seasonality - and why it should be taken seriously as an indicator of overall inflation pressures (Link here.)
- Their analysis, "Is inflation still slowing? Early 2025 data pivotal to outlook", points to "mildly elevated core PCE inflation in the first quarter of 2025, at around 2.7 percent annualized, as greater persistence in first-quarter inflation is somewhat offset by easing labor market tightness over the past year ... If the labor market remains stable at current conditions and long-run inflation expectations remain anchored, [our] regression would predict more muted inflation readings in the rest of the year and near 2 percent for 2025 as a whole."
- However, the early 2025 inflation readings - including of course this week's January data - could be telling, as their research suggests that Q1 inflation tends to be more sensitive to inflation persistence ("may be driven by a higher likelihood for firms to change prices at the start of the year") and changes in labor market slack, making it a bellwether for overall inflation pressures: "caution may still be warranted until early 2025 inflation readings are released. The regression underpredicted the first quarter of 2024, and there is uncertainty regarding how much the labor market has actually cooled. The greater sensitivity of first-quarter core PCE inflation to persistence and the state of the business cycle should render those months of data more informative about the underlying momentum of inflation."
- "If it turns out inflation is more persistent than previously thought or overall demand is too elevated for inflation to converge to 2 percent, the results suggest that such concerns would more likely manifest early in the year. Further, the slower monthly pace in the second half of the year is not necessarily as encouraging as similar readings would be early in the year. If instead early 2025 inflation data are subdued, similar to late 2024, 12-month inflation rates would make considerable progress toward the 2 percent goal in only a few months and signal economic conditions likely consistent with price stability."
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