WisdomTree Minds on the Markets
WisdomTree
Minds on the Markets
WisdomTree
Minds on the Markets
What Does “Sticky” Inflation Really Mean?
ARCHIVE: Week of March 11, 2024
Although the financial markets have been cheering the declining rate of inflation over the last year or so, based upon continued media stories, it appears as if U.S. households haven’t quite received the message. That begs the question: is the message on recent inflation trends telling the whole story?
Certainly, one of the more widely used descriptors of inflation’s persistence is the term “sticky.” But what does that really mean? Some could argue that it means only a grudging improvement in the rate of price pressures. For others, it is a reference to the notion that, yes, the rate of inflation has come down quickly and noticeably, but prices are still way up from where they were in 2020 and in pre-COVID-19 times.
In our opinion, the disconnect between official government reports on inflation and how the U.S. consumer views price developments is an important consideration. No, we’re not going to get into presidential election politics, but rather, just lay out what could be the root cause of this disconnect.
In order to better understand inflation, one needs to start at the beginning of the process. We think it’s safe to say inflation needs no introduction. However, there are other terms in this discussion that get floated around somewhat indiscriminately: deflation and disinflation.
Investors get confused between disinflation and deflation. Disinflation can be defined as inflation still rising but at a lesser rate of increase over time. Deflation is the opposite of inflation and entails falling prices.
What the markets have been witnessing throughout 2023 and early here in 2024 is disinflation. In other words, overall prices, as measured by the various government inflation indicators, are still increasing but at a reduced pace compared to the prior 12-month figure. Let’s look at the most widely followed measure of inflation: the Consumer Price Index (CPI). For January, the latest data available as of this writing, the year-over-year gain for CPI came in at +3.1%. Obviously, this is substantially lower than the June 2022 peak reading of +9.1%, but notice the recent inflation print still has a “plus” sign in front of it.
In terms of deflation, the “plus” sign gets replaced by a “negative” one because broader prices are now actually declining. This is a scenario that investors have rarely had to contend with over history. Even in the worst economic depths of COVID-19, the lowest annualized rate for CPI still managed to be in positive territory at +0.1%. In fact, over the last 30 years, negative year/year CPI prints have occurred only in two periods: early 2015 and the financial crisis-related timeframe of 2009.
That brings us to 2024. While the Fed and the markets are pleased with recent inflation trends, what tends to get lost in the shuffle is that the 2021/2022 surge in inflation has not been reversed, and broader prices remain quite high in comparative terms. This is what U.S. households are seeing and being reminded of regularly with stories about the price of a Big Mac or a Five Guys burger.
The more pertinent economic question going forward may be what development may end up hurting consumer spending more: prior Fed rate hikes or elevated prices for discretionary spending?
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