By Michael S. Derby
(Reuters) – In another setback for the Federal Reserve’s inflation fight, data showing inflationary pressures cooling in recent months were in fact a mirage, and show underlying price pressures actually have been accelerating.
The new findings out Thursday from the New York Fed add a fresh complication to the monetary policy outlook and could help reinforce the view that aggressive Fed rate hikes have yet to make the needed dent in price pressures. That, in turn, could drive the central bank to go even further with rate increases over time.
The New York Fed report focuses on an in-house model called the Multivariate Core Trend, which is designed to provide a more complete reading on the factors and trends coming out of the personal consumption expenditures price index, which is the Fed’s preferred way of measuring inflation.
In its blog post, bank economists said recent upward revisions to inflation data coupled with higher-than-expected levels of inflation had changed the picture on what had appeared to be a cooling in price pressures.
The January MCT reading stood at 4.9%, up from December’s upwardly revised 4.8%, which had initially been reported at 3.7% a month ago. That compares with a PCE price index year-over-year reading of 5.4% in January, and a rise, stripped of food and energy costs, of 4.7%. The Fed’s inflation target is 2%.
The January MCT reading “provides a quite different narrative for the recent dynamics of inflation persistence relative to what we had prior to the new release,” New York Fed economists wrote.
The pickup in inflation in the model has been driven by core goods and core services stripped of housing components. The stickiness of nonhousing services inflation, in particular, has been a concern for central bank policymakers, including Fed Chair Jerome Powell, who has repeatedly noted the lack of progress made in bringing it down.
The New York Fed research shows it’s even more problematic than previously estimated. “Relative to their pre-pandemic averages, core goods trend is about 0.9 percentage point higher and core services ex-housing is 1.1 percentage point higher.”
The bank said, in contrast, housing inflation was elevated but had stabilized in recent months.
The New York Fed released its report after Powell on Wednesday completed two days of testimony before Congress. In his appearance, Powell acknowledged that inflation pressures had been proving more persistent than he expected in an economy whose overall performance was also stronger than policy makers had thought.
Powell said this landscape means the Fed stands a good chance of having to raise rates higher than it recently expected and keep them there for longer. The Fed chief’s testimony also pointed to the rising prospect that after slowing the pace of its rate rise campaign last month to a quarter-percentage-point increase, it may have to go back to larger moves and boost the federal funds rate target by half a percentage point at the March 21-22 Federal Open Market Committee meeting.
In his testimony, Powell acknowledged the recent softening in inflation had been washed away by revisions and the idea that price pressures had peaked has taken a hit. He noted before the Senate Tuesday that late last year there had been a “promising” shift in inflation toward lower levels that has been washed away in revisions.
As it now stands for inflation, there’s been some softening but not in the place where it most needs to cool off after goods inflation has shifted lower. “There’s not a lot of improvement yet to be seen in the largest sector, which is not housing services.”
(Reporting by Michael S. Derby; Editing by Dan Burns and Diane Craft)