January 2024 CPI Update

I continue to be surprised at how much of the reaction to monthly CPI updates fails to account for the well known lag that currently affects the shelter component. As far as I can tell, the stock market yesterday fell on news of inflation that came in above target and above expectations. But that is only because of the lagging shelter component.

This report seemed to shift expectations of a Fed rate cut later in time. I have been a dove, but I guess after 19 months moving right along horizontally around the 2% target (excluding shelter), it is getting harder and harder to claim that a 5% rate is particularly hawkish - though, of course, the yield curve still portends cuts down to about 3.5% over the next couple of years. Rates on longer duration debt reflect those expectations, so in our current context I’m not sure it matters that much what the current rate is. The market has never really expected rates above 3% to be permanent, and so I suspect that the very short term rate isn’t particularly important.

And, monetary measures such as currency in circulation and M2 spiked during the Covid scare, and have been trending back down to a regular growth trend level. M2 has actually started to grow along that trend again for the past few months. The Fed has made their open market operations much more complicated since 2008. In the past, they simply bought some Treasury bills to inject cash into the system. It’s harder to see now, but it seems clear, at least, at this point, that hitting the current target interest rate does not require sucking liquid cash out of the economy.

The size of the Fed balance sheet is shrinking. That is the slow reversal of “quantitative easing”. I think the inflationary effects of QE are pretty weak, but in any case, the reversal of QE doesn’t seem to be preventing liquid assets from growing.

Anyway, inflation this month was moderate, and even though I would call it more moderate than the headline numbers indicate, and even though I have tended to call for a more dovish Fed posture, I can’t say that there is any sign that current monetary policy is particularly disruptive. The Atlanta Fed real GDP forecast for the 1st quarter is currently about 3.4%. With 1.5% or 2% inflation, that will continue nominal GDP along a 5% path. I have nothing to complain about.

There are some details worth considering from this report. I’m going to pull together a few threads here, so I’m putting this month behind the paywall for subscribers.