When I discussed with David Kotok his recent commentary on holiday inflation (“Holiday Inflation?” https://www.cumber.com/market-commentary/holiday-inflation”), David noted that inflation was still on a path towards the Fed’s 2% target, that core inflation was key, and that recent data on sales tax revenues are weakening, consistent with a continued decline in prices. Finally, he observed that the Fed seemed determined to stick to its present course of action and will continue to “talk tough” when it comes to its objectives.
In the course of our interchange, he also posed the question of whether core inflation could actually go to zero. This question triggered a look into what the actual path for core inflation has been and whether there is evidence that it has actually hit zero in the past. It turns out that trying to answer that question is not as simple as it may seem because there is more than one measure of core inflation – i.e., core PCE inflation and core CPI inflation. Equally important, there is the issue of what period of time we are concerned about. Month over month? Year over year? Quarter over quarter? (Just to name a few.) The following charts show the historical path of inflation for different measures and over varying time periods.
This first chart shows the history of core CPI measured as the percent change from a year ago, month by month. All charts are from the FRB St. Louis FRED database. That measure has never hit zero.
The next chart shows the core CPI monthly percentage change annualized. That measure hit zero in the ’60s and early ’70s, but only about eight times or so since then. Judging from this chart, the monthly change did hit zero, but there did not seem to be any staying power in terms of the core CPI’s remaining at zero over even a short period of time.
If the core CPI has not shown that it has persistently been stable at zero, what about the core PCE? It is a somewhat different metric. It is, for example, less dependent upon housing.
The following chart shows the core PCE measured as the percent change from quarter a year ago annualized. This measure has proved to bounce consistently around zero, but is there staying power over time?
The next chart shows quarterly core PCE percent change from the previous period. That measure has hit zero only two times, during the 2008 Great Recession and in the 2020-2021 Covid recession.
So, while the year-over-year changes in core PCE bounce around zero, there is little stability from quarter to quarter as it relates to zero inflation. We are left with the answer to our question: While core inflation, as measured, can hit zero, there is little evidence that it has remained steady at zero or is likely to do so, even in infrequent periods of recession.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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