In his press conference yesterday, Chairman Powell noted: “if we see what we expect to see” which is inflation “either reaching a peak or flattening out” then the FOMC will continue to raise rates to the plausible range of the neutral rate—the level at which they are neither a tailwind nor a headwind for the economy—but not beyond that.

He repeated several times that the Fed can only affect demand, not supply, while the macro shocks the US economy is currently digesting have been primarily on the supply side, i.e. the pandemic’s impact, recently exacerbated by the war in Ukraine and soon, by more supply-chain snarls from China’s latest round of Covid shutdowns.

One question we’ll ask over the next few weeks is how—in the current environment—to differentiate between inflation, i.e. changes in the general price level, and changes in relative prices. Relative price changes are almost always a powerful signal of where resources need to flow. Do some of the recent extreme pricing trends signal a need for a substantial (i.e. once-in-a-generation) reallocation of resources to address post-pandemic economic realities, e.g. for investment into novel, more resilient supply chains or into the redesign of jobs to meet the post-COVID demands of workers?

Near the end of the press conference, Chairman Powell emphasized the FOMC’s unusual degree of uncertainty about the inflation outlook, and its intention to be ‘nimble’ in response to incoming data:

Making appropriate monetary policy in this uncertain environment requires a recognition that the economy often evolves in unexpected ways. Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook, and we will strive to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain time. We are highly attentive to inflation risks. 

If a chastened and nimble FOMC is watching incoming (and hopefully real-time!) data with the rest of us, this presents an opportunity. If we can get conviction on inflation’s current path, that can translate—in a pretty straightforward manner—into conviction on the pace and timing of rate hikes.

Transportation inflation decelerated in April

The rest of this post gives an overview of Dotdat’s real-time inflation for the Transportation sector, the most important of the eight sectors (in BLS-speak, ‘major groups’) that make up the headline CPI, accounting for 85 percent of the variation in the headline number.

In April, Dotdat’s real-time Transportation CPI increased 1.9 percent on a seasonally-adjusted basis after rising 3.7 percent in March (compared to the 3.9 percent March print for the Transportation CPI-U). The substantial decline in the gasoline index (as noted in yesterday’s post) accounted for the bulk of this deceleration. Transportation inflation contributed about 30 basis points (bps) to the 40 bp decline in real-time headline inflation over the month.

Industries with high fuel costs also lowered their prices — Dotdat’s real-time Airfares CPI decreased by 0.9 percent in April on a seasonally-adjusted basis compared to its 11.1 percent rise in March (and in line with the 10.7 percent increase in the March Airfares CPI-U).

Dotdat’s real-time Used Vehicle CPI also decreased 1.3 percent in April on a seasonally-adjusted basis after decreasing 1.3 percent in March (and compared to the 3.8 percent decline in the Used Vehicle CPI-U).

Dotdat’s real-time New Vehicle CPI decreased by 0.7 percent in April following a 0.4 percent decline in March, lower than the BLS’s 0.2 percent March increase but in line with industry sources—e.g. the Kelly Blue Book found that new-vehicle average transaction prices fell by 0.3 percent in March.

Finally, Dotdat’s real-time Car Parts and Equipment CPI rose 0.11 percent in April after falling 0.04 percent in March (and consistent with the BLS’s 0.2 percent decrease)

We’ll follow up this overview with a future post that focuses more on pricing trends on the services side, including car insurance and servicing/repair.

It bears repeating that while we use the BLS’s item definition, weighting, and aggregation processes to build our real-time indexes, we don’t expect them to match the official CPI releases exactly. We expect our price indexes will exhibit the same dynamics as the official indexes over time — though observed at a much higher frequency.

Tomorrow’s post will look at some of the trends in the Food and Beverage sector, how some of the earlier pandemic trends have petered out (meat and fresh fruit inflation has peaked) while others have just emerged (Ukraine’s impact on wheat prices is driving bakery and cereal prices higher).