Jun 30, 2023 - Economy

Slow progress for the "core" inflation problem

Illustration of silver binoculars with green percentage symbols in the lens

Illustration: Annelise Capossela/Axios

There is no doubt there's progress underway in bringing down inflation. There is also no doubt that progress has been exceptionally slow, something confirmed by the latest price read.

Driving the news: May's overall Personal Consumption Expenditures Price Index plunged, the Commerce Department said Friday morning, posting the lowest 12-month change in two years.

  • But the core measure, excluding food and energy and favored by the Federal Reserve for clues about underlying inflation pressures, is coming down at a glacial pace.

Why it matters: The longer that core inflation's great comedown takes, the more likely that central bankers will get impatient and see a need to tighten the monetary screws further. It also increases the odds of another unlucky break reversing hard-fought progress on prices.

By the numbers: Overall consumer prices rose 3.8% in the 12 months through May. That is down from 5.4% at the beginning of the year. But excluding prices for energy and food, inflation rose 4.6% — essentially the same 12-month rate seen in January (4.7%).

  • Over the last three months, core consumer prices are up an annualized 4.15%, which is actually higher than the rate in the final three months of last year (3.71%).

Worth noting: There was more promising news in the "super-core" inflation measure Fed chair Jerome Powell says he's watching closely.

  • Core services excluding housing, the sector most likely to be impacted by wage pressures stemming from the strong labor market, rose at a 3.9% three-month annualized rate, slowing from April's 4.4% rate.
  • Moreover, with rents flatlining or even starting to decline, housing is on track to start pulling core inflation down in the months ahead.

The intrigue: The "core problems" are a parallel theme across the Atlantic. Preliminary data from the euro area shows overall annual inflation was 5.5% in June, a notable slowdown from the 8.6% at the beginning of the year. That is a result of fading effects of disruptions stemming from Russia's invasion of Ukraine.

  • But core prices haven't seen equivalent cooling in recent months.

What to watch: "The good news is that while low inflation may seem elusive, it is certainly no stranger, and central bank actions can deliver it," Gita Gopinath, the deputy managing director at the International Monetary Fund, said in a speech this week.

  • She compared the wait for inflation to recede to the play "Waiting for Godot," but added, "Unlike the characters in Godot, we are not waiting for a potential stranger to arrive; we are inviting an old friend to return."
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