2026-09-04XQuote

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Good post Diane. This is core PCE, the Fed’s favorite inflation metric (until then inflation task says otherwise). It is color-coded to reflect the different expansions. Green=post 9/11 recovery Red=post Financial Crisis recovery Blue=post COVID recovery Also shown is the average and +\- 1 Standard Deviation range (shaded) for each period. —- From 2009 to 2021 (red) Core PCE exceeded 2% only 5 times, 3 in 2012 and 2 in 2018. The average inflation rate for this nearly 12 year period was 1.56%. Post COVID (blue) just completed it 65 consecutive month above 2%, something Warsh specificially highlighted in his Jackson Hole speech. And its latest reading is still above 3%. Its average has been 3.53%, fully 2% higher than the previous cycle. —- The problem with inflation is not that it is accelerating, rather is has not been disinflating enough to get anywhere near 2%, and is still above 3%. This is a problem, reflected in nearly every political poll saying “affordability,” inflation by another name, is far and away the number 1 economic problem in the country. For those that dismiss inflation concerns... The blue post-COVID period is not like the previous two cycles (the famous Seasme Street song) What is needed is a strong argument for why inflation has been above 2% for 65 straight months and what just changed that will now disinflate back under 2%. Diane lays out a strong case that not only is that massive disinflation not here, but a stronger case can be made reinflation is more likely. —- The bond market is worried about this as long term yields are multi-year highs. Once this problem is addressed, yields can calm down. Or, as I often say. “Bond Traders can stop panicking when the Fed starts panicking.” Hike rates, and long-term yields can peak. Cutting rates, and refusing to hike, is driving them higher. @profplum99

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Was on a meeting with about 50 economist across industries & countries this week. The meetings are strictly Chatham House Rules, which means there is not attribution but the picture on inflation that emerged was striking, hot and reflects what we have seen in ISM surveys for both the service sector & manufacturing. The most important message in ISM price indexes is that they both signal a resurgence of pipeline inflation pressures rather than further disinflation. Manufacturing reflects the direct effects of tariffs, imported inputs, and supply chain disruptions. Services reflects the broader pass-through of those costs, augmented by labor shortages and wage pressures. The ISM surveys reinforce the idea that we are seeing aftershocks colliding with one another: - Trade-war and tariff shocks are lifting goods prices. - Transportation and logistics costs are rising. Those increases are increasingly spilling into services. - The combination keeps the Fed worried that inflation could prove more persistent than headline data alone would suggest. What was perhaps most striking at the meeting in this context was the debate about what it would take for the Fed to derail an inflation that many industry specialists are seeing as entrenched. The discussion quickly pivoted from the Fed needs to hike to how much will it take to derail a more entrenched bout of inflation. There is a fear it is getting into firm and consumer expectations even as the consumer splinters on its reaction to price hikes. The Fed’s Beige Book echoed the sense that inflation pressures are heating up again, even as more price-sensitive consumers were having to make tough tradeoffs. The Beige Book underscored bifurcation of spending gains or the K-shaped economy narrative we have seen for some time. The challenge for the Federal Reserve is that those bifurcated gains are enough to keep spending and inflation rising. It is a problem that will not likely go away is the Fed just holds off to wait and see. Pockets of labor shortages emerging, which is showing up in the Atlanta Fed wage tracker in July, with some firming of job stayers and more of a premium for job hoppers. The ADP report for August showed a very slight cooling in job stayer wages but not in overall compensation and the job hoppers are doing better. Benefits are poised to accelerate as wicked hot pace again next year, which further buoys service sector inflation along with inequality. The longer inflation lingers, the higher the risk that it takes on a life of its own and is harder to tame.
DianeSwonk ↗