The American inflationary pressure is falling rapidly.
When discussing inflation, there is often a debate about which price index is the correct one to follow. So I thought – why not use them all?
Thus, I have constructed what I have called an Inflation Pressure Index (IPI), in which I have examined a range of different measures of American inflation, both in a broad and more narrow sense.
I have therefore looked at a total of nine different indicators, ranging from the normal Consumer Price Index and the Federal Reserve’s preferred index (PCE) – and these indices excluding food and energy prices. In addition, I have looked at producer prices, housing prices, and oil prices – as well as wage and money supply growth.
I have de-trended each of these variables using an HP filter and observed how the median of these indices has developed. If the IPI is above 1, then it is an expression of accelerating inflationary pressure, and conversely, if it is below 1, then it is an expression of declining inflationary pressure.
And where is the IPI now?
We see that the IPI peaked in June 2022 – and since then, the index has been falling, and for nearly a year, the index has been below 1.
In other words, it is quite clear that the “inflation episode” from 2021-22 is now clearly behind us.
Therefore, the only thing now can justifying the Federal Reserve not lowering interest rates is if the natural interest rate has increased – something I certainly is not ruling out. But for now at least there is certainly no significant inflationary pressures in the US economy.