Year-Over-Year CPI Rate – All About That Base; With Apologies to Meghan Trainor

The year-over-year change in the All-Items CPI for May 2023 was 4.13%. My forecast is that the year-over-year change in the All-Items CPI for June 2023 will be less than 4.13%. Barring revisions, the seasonally-adjusted month-to-month percent change in the June CPI would have to be 1.19% non annualized for the year-over-year change in the June All-Items CPI to be equal to May’s 4.13%. Coincidentally (I think), the last time the month-to-month non-annualized change in the CPI was as high as 1.19% was June 2022, when it was exactly 1.19%. If the June 2023 All-Items CPI increases by 0.55% (non-annualized), the average non-annualized percent change in the CPI in the three months ended May 2023, the June 2023 year-over-year change in the CPI would slow to 3.47% vs. May’s 4.13%.

This is not economics. Rather, it is arithmetic. And it is all about that June 2022 base. (It took me a while, but I got there.) Plotted in Chart 1 are the month-to-month annualized percent changes in the All-Items CPI (the blue bars) along with the monthly observations of the year-over-year percent changes in the All-Items CPI (the red line). The June 2022 CPI increased a whopping annualized 15.22%. The June 2022 level of the CPI is the base for the June 2023 year-over-year percent change observation. With such a high June 2022 base, the bias is for a slowing in the year-over-year percent change in June 2023. The year-over-year percent changes in the All-Items CPI beyond June 2023 are not likely to slow as much because the high June 2022 base will drop out of the calculation. However, in the 11 months ended May 2023, the All-Items CPI has increased an annualized 3.17%. So, barring some negative supply shock in the remainder of 2023, the year-over-year change in the December 2023 All-Items CPI is likely to be much lower than the 6.44% for December 2022. For example if the CPI increases a non-annualized 0.3% from June through December 2023, the December 2023 year-over-year change in the All-Items CPI would be 3.59%. I believe that the monthly non-annualized changes in the All-Items CPI will, on average, be less than 0.3%. Thus, I believe that the year-over-year change in CPI as of December 2023 will be less than 3.59%.

Now, the Fed has indicated that the measure of consumer inflation that is the basis of its monetary policy decisions is some variant of the Personal Consumption Expenditures (PCE) Chain-Price Index. For the sake of argument, let’s assume the Fed’s 2% inflation goal is the all-items PCE Price Index. The PCE Price Index data in Chart 2 are similar to those CPI data in Chart 1 except that the last datum point charted is for April 2023. On Friday, June 30, 2023, the May 2023 PCE Price Index data will be released. In April 2023, the year-over-year change in PCE Price Index was 4.36% and the month-to-month annualized change was 4.46%. The April 2022 base was relatively low at 2.42% month-to-month annualized. But the 2022 bases rise over the next two months, with the month-to-month annualized changes for May at 7.52% and for June at 12.56%. Thus, I expect that the year-over-year changes in both the May and June 2023 PCE Price Indices to be lower than April 2023’s 4.36%. The June 2023 PCE Price Index will be reported on July 28, 2023, after the Fed FOMC meetings of July 25-26 2023. Pity. If we stipulate that the month-to-month non-annualized change in the PCE Price Index is 0.3% in each of the months from May through December 2023, then the December 2023 year-over-year change in the PCE Price Index would be 3.83% vs. December 2022’s 5.30%. Again, I expect the monthly changes in the PCE Price Index going forward in 2023 to average less than 0.3%.

Remember when the Fed said that 2% annual inflation was its target on average? The Fed never specified over what time period the average referred to. The Fed’s failure to provide a time period for its target 2% average inflation rate strikes me as a variation of the forecaster’s dictum that if you give a number, don’t give a date associated with that number. I doubt the Fed had in mind a 10-year average, but if it did, as of April 2023, it is close to its target. Plotted in Chart 3 are the monthly year-over-year percent changes in the PCE Price Index from January 2013 through April 2023. From 2013 through 2021, the year-over-year changes in the PCE Price Indices were more often below 2% (the red horizontal line) than above it. Throughout most of 2021 through April 2023 the year-over-year changes have been above 2%. But the average year-over-year change in the PCE Price Index from January 2013 through April 2023 was 2.18%. If the Fed is determined to keep increasing the fed funds rate until the year-over-year percent change in the PCE Price Index or the Core (what a ridiculous concept) PCE Price Index is close to 2%, the US economy will experience a deep recession. Moreover, whatever variant of the PCE Price Index the Fed chooses to concentrate on, it will end up being below 2% for an extended period of time.