Atlanta and Cleveland Have it Right on InflationJune 13, 2023
Using our AI engine, we prompted a description of the Atlanta Fed’s Flexible CPI. What we got was a pretty decent explanation:
“The Atlanta Fed Flexible Price Consumer Price Index (CPI) is a measure that is calculated from a subset of goods and services included in the CPI that change price relatively frequently. This index is based on the premise that flexible prices are quick to change and, therefore, when these prices are set, they incorporate less of an expectation about future inflation.”
So, it doesn’t reflect things like rent or used car prices (the average age of the US auto fleet is the oldest its ever been at around 12 years old). It does reflect purchases of needs rather than wants—things like groceries, dry cleaning, restaurant or hotel pricing, etc. In a way it is similar to the popular “Supercore” inflation metric (services ex-housing) in so far as it eliminates the largest infrequent purchase one makes.
In our work, this measure leads the CPI by about eight months, and it is falling at a 3.36% 3-month AR.
This telegraphs a rapidly falling CPI, except obviously for shelter. But there is good news on this front too. The Zillow Rent Index, which leads the owner’s equivalent rent portion of the CPI, has rolled over. Rents now are growing at roughly half the rate of the OER component of the CPI. As this 8% rate falls toward 4%, this will accelerate the rate at which the CPI declines into the fall.
Clearly the market is focused on what the Fed will say and do in tomorrow’s meeting. Do they acknowledge the clear improvement in inflation and the glide-path back to their desired range? Real-time projections of inflation continue to fall as witnessed by the Cleveland Fed’s CPI Nowcast. It forecasts a pretty precipitous drop in the near future.