MNI INTERVIEW: Scant Signs Inflation Pressures Abating - Altig

The Federal Reserve's aggressive monetary tightening campaign has made scant difference in easing or narrowing U.S. inflation pressures so far, Atlanta Fed research director David Altig told MNI Friday.

Inflation is "very high and it seems to be stuck with few signs of mitigating yet," he told MNI's FedSpeak podcast. "The key development over the course of the next year is whether we're going to see moderation proceed at a pace that gets us pretty quickly to something near the the FOMC's goal, and that seems highly uncertain."

Ahead of the September FOMC meeting, Altig said Atlanta Fed staff were surprised to learn that supply pressures are not relaxing for firms in the Fed region, adding that business contacts described the rolling nature of problems and disruptions as a game of Whack-A-Mole.

"We were hearing very little in the way of closing supply and demand gaps," he said. "The biggest concern at the moment is whether or not the fundamental supply and demand imbalances that we need to see resolve to really get the inflation rate moving in the right direction on a sustainable basis, they just don't seem to have emerged yet." (See MNI: Mester: Wages May Be Stabilizing; Need More Hikes)

U.S. CPI jumped a stronger-than-expected 0.1% in the month of August and core CPI rose 0.6%, dashing hopes that inflation might have decisively peaked in June.

COMPELLING EVIDENCE

The FOMC's current push to slay inflation at 40-year highs is the most aggressive of his career, said Altig, who started at the Cleveland Fed in 1991. "It makes some sense that an outsized inflation issue would elicit an outsized policy reaction," he said. The Fed this week raised rates 75 basis points for the third time in three straight meetings to a range of 3% to 3.25%, while fresh projections showed rates peaking next year at 4.6%.

Altig said Atlanta Fed staff forecasts see U.S. growth under 1% next year, with some modest increase in the unemployment rate and some progress on inflation. But "obviously the risks are weighted to the downside," he added, also noting that the narrow path relies on eliminating job vacancies rather than jobs.

Asked what could constitute compelling evidence that inflation is moving down, Altig said Atlanta Fed staff will probably be arguing that it has to do with the breadth of price changes. "One statistic that we look at religiously almost now is the percentage of the components in either the CPI or the PCE ... on a weighted basis that are rising at rates that are inconsistent with stability, so from 3% or greater, 5% or greater," he said. "Right now, it's around 70%," he said.

Those price pressure signals did not really begin to emerge until the end of the summer in 2021, and in normal times the portion of components in the broad center of the consumer market basket that rise at an outsized rate is closer to 25%, he said.

"We definitely want to see that kind of statistic move in that direction," he added, noting indicators of core prices such as the Cleveland Fed trimmed mean and the Dallas Fed trimmed mean. "Those numbers just aren't improving very quickly."

BROAD-BASED MIDDLE

Even if shelter inflation continued to flare up, the Atlanta Fed research director said he would take comfort in seeing continued downward pressure elsewhere.

"It's that broad based middle that kind of is the key I think at figuring out whether progress is being made," he said, even if the headline or core number as traditionally measured doesn't necessary reflect that progress.

"We would want to see for some period of time, maybe more than a month or two even, a real broad softening of price pressures and that's just a long ways away from where we are now," he said.