Inflation is still problematic, supporting real rates

Source: www.tradingview.com

There is still an inflation problem. The CPI y-o-y increased at a decreasing rate in the latest release - 8.5% vs last month's 9.1% (blue line chart). However, this masks underlying concerns. First, outliers affect the print in a data series like the CPI. I.e. the goods within the basket that show extreme movements may exert an overall influence, e.g. energy and food.

Energy printed a monthly increase of 4.6%, down from the 7.5% rise in June. But what about the rest of the basket in the inflation calculation? Therefore, it will be instructive to consider a median CPI print (black line chart). Here, we look dead centre, and outliers exert no undue influence. Moreover, it gives a better view of the stickiness within the CPI basket.

The latest number out of the Federal Reserve Bank of Cleveland shows an increase in the median series to 6.3% y-o-y (red leg of black line chart), with no signs of a slowdown. The resiliency of this series will impact Fed monetary policy because, at some point, it will impact the headline inflation numbers, both CPI and PCE.

If the median inflation shows moderation, the Fed's job inherently becomes easier. I.e. the sticky inflation will be responding to the monetary policy transmission mechanism. As such, this is a critical metric to keep an eye on.