Inflation is Dead! Long Live Inflation!

In the end, headlines about inflation are grossly exaggerated. It is far from dead, and that might not actually be a bad thing in the long-term.

This week, the Bureau of Labor Statistics (BLS) announced inflation was dead.

As in kaput.

Or at least that is what some of the headlines would have had you believe.

Better put, the BLS announced the Consumer Price Index (CPI) rose 0.2% during June 2023. This made the product of the trailing 12-months through the end of the quarter 3.0%.

That is certainly more acceptable than the 9.1% year over year number through last June. Isn’t it? So, why can’t we say inflation is dead? If not dead, at least the worst is probably over. I will grant you that. However, this last month’s reading might be the best we see for the next several months. After all, it isn’t personal. It is just math.

The reason the headline CPI number has fallen so substantially in 2023 is because it was out of sight the first 6 months of last year.

Put another way, we have been replacing very high monthly CPI observations from 2022 with more normal ones this year.

For instance, rounding to the nearest tenth, the average monthly CPI observation was 0.8% for the first 6-months of last year. This year, it has been 0.3%. As result, again, the 12-month calculation has gone down sharply.

Unfortunately, this is where the fun probably stops.

You see, for the last two quarters of 2022, the headline CPI number averaged a far more normal 0.2%. Therefore, inflation was lower the last 6-months of last year than it has been the first 6-months of this year. How now, brown cow?

You read that correctly.

Further, the monthly CPI for July 2022 was 0.0%. As such, if we replace that number with anything greater than 0.0%, the trailing 12-month CPI will be higher for July 2023 than it was this past month.

What’s more, or worse even, August 2022 posted a 0.2% CPI observation.

Therefore, it is difficult to imagine headline inflation officially coming down during the 3rd Quarter. If it does, it won’t be by much. Please feel free to call me a wet blanket, killjoy, party pooper, sourpuss and/or downer all you want.

So what does this actually mean? What is the Fed going to do if inflation behaves the way I am describing it?

  • First, if this is news to anyone sitting on the Federal Open Market Committee (FOMC), they need to resign and find a job teaching at, I don’t know, American University or some such place. There should be no spot at the Fed for them. Second, the headline CPI isn’t the Fed’s preferred inflation gauge. This would be the so-called ‘core’ PCE (personal consumption expenditures) Price Index (PCE).
  • Washington is nothing, if not inefficient. After all, the BLS calculates the CPI, whereas the Bureau of Economic Analysis (BEA) produces the PCE.

Ergo, we have two Federal agencies producing their own, roughly similar, inflation gauges. Okay.

The biggest differentials between the two are the weights for ‘shelter’ and the nebulous ‘other goods & services.’

  • The PCE assigns an aggregate 21.8% weight to shelter.
  • By comparison, the CPI gives it a 33.2%. As such, as rental equivalencies start to fall in the second half of the year, the core CPI could start to fall more rapidly.
  • Also, the CPI gives ‘other goods & services’ only a 3.2% allocation.
  • The PCE, on the other hand, puts a 8.1% weight on this segment of the economy. Unfortunately, these are arguably elastic goods, things like tax preparation fees, cigarettes, funeral expenses, haircuts and personal care products.
  • To that, the ‘other’ segments of the CPI have been trailing in excess of 6.0% over the last 12-months.

As a result, it is difficult to imagine the core PCE doing a swan dive (absent it being a black swan dive), if you catch my drift. It was an estimated 4.6% through May 2023, and will likely dip a little with the June observation. However, it is difficult to image this getting to less than 3% by the end of the year.

Of course, stranger things have and will happen.

The probable case scenario is the headline CPI and PCE numbers will likely remain stagnant between now and the end of the year, with some monthly vagaries. For their part, the core inflation gauges will likely see some improvement, but not anywhere close to the Fed’s normal comfort zone.


This means the Fed, if it is so inclined, could keep the overnight lending target higher for longer than investors currently anticipate. While that sounds like a massive downer, it isn’t the death knell many fear. After all, uncertainty about the future price of money can be a far stronger economic deterrent than the actual price.

If you remove the uncertainty from the ‘equation,’ potential borrowers and lenders can make better informed decisions.

As a result, higher for longer interest rates will likely constrain economic growth, but not necessarily crush it.

Further, and we can agree to disagree if you wish, sustained higher real interest rates could have a beneficial impact on the long-term health of the economy. How so? Because investors will need to have a higher return on investment in absolute terms. If this indeed happens, money will flow to projects with even higher and better uses.

In the end, just as newspaper reports of Mark Twain’s death were, as he described it, grossly exaggerated, so are the headlines about the end of inflation. It is far from dead, and that might not actually be a bad thing in the long-term.

That is IF it brings about more normal coherent monetary policy moving forward.

John Norris

John Norris

Chief Economist

Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.


Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.