An Inflation Lesson In One Graph

The July inflation reports confirm that the ill wind of bad money continues to blow. On a Y/Y basis the CPI was up by +3.3% and the PPI, as reported this AM, was higher by +4.7%. And if you happen to glance at the upstream PPI for all commodities and goods in process—a measure of what is coming down the pike during the months just ahead—the Y/Y rise was +8.3%.

Needless to say, those figures hardly comprise a case for Fed “easing”, notwithstanding the usual Wall Street talking head chatter this AM aimed at what amounts to picking pepper out of the fly shit. That is to say, the headline CPI was up by 3.30% on a Y/Y basis versus the June reading of 3.46%. So a mere 16 basis points of relief is supposed to be, apparently, an all-clear signal to the money-printers in the Eccles Building.

Well, no, when it comes to identifying inflation trends the most reliable way to separate the signal from the noise lies in our trusty 16% trimmed mean CPI. Again, it removes each month the 8% highest and 8% lowest change items from the thousands of items contained in the CPI market basket. So what you get is an ever-changing mix of the 84% CPI items away from the edges.

As a smoothing technique for short-run monthly readings this approach is far more sensible and reliable than simply eliminating food and energy permanently on the grounds that they have been volatile historically. As it happens, therefore, the “core” inflation rate measured by the 16% trimmed mean CPI was also elevated in the Y/Y July reading, posting at 2.60%.

Moreover, as it happens the July reading marked the 76th consecutive month that this core measure has exceeded the Fed’s ballyhooed 2.00% target!