“Persistent” inflation in the US is on the rise – argues against a 50bp FOMC Sep rate cut

Although the data relates to July (with the upwardly revised June result added), the Fed released it on September 3.

If you’re familiar with this measure of inflation, this rise provides another reason why speculation of a 50 basis point rate cut by the Federal Open Market Committee on September 18 is unwarranted and that a 25 basis point rate cut is closer to the truth.

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If you’re not familiar with data….get ready, here we go:

Multivariable core inflation is a measure developed by the Federal Reserve Bank of New York to provide a more accurate and reliable estimate of the underlying inflation trend in the U.S. economy. It seeks to address some of the shortcomings of traditional inflation measures, such as the CPI or PCE, by focusing on long-term inflation trends rather than short-term fluctuations caused by volatile price changes.

Here is a summary of the key points about the MCT inflation measure:

1. Purpose and Background:

• Traditional measures of inflation (such as the CPI or the personal spending index) can be affected by temporary factors such as energy or food price shocks, which may not reflect the true underlying inflationary trend.
• The Multivariate Core Inflation (MCT) measure was developed to extract the continuous component of inflation by filtering out temporal noise.
• MCT uses multiple data sources, models and statistical methods to provide a more stable reading of inflation trends.

2. How it works:

• Inflation under MCT theory is based on a multivariate statistical model, which means that it takes into account many variables or components of the economy that affect inflation, such as core prices (which exclude food and energy), economic activity, and financial conditions.
• The model separates short-term noise (temporary price changes) from the longer-term underlying trend of inflation.

3. Why is this important:

• It provides policymakers, economists and investors with a clearer signal about the long-term direction of inflation, free from temporary disturbances.
• It is particularly useful for central banks, such as the Federal Reserve, because it provides a tool for measuring inflationary pressures that may influence monetary policy decisions (e.g., interest rate changes).

4. Comparison with other measures of inflation:

• Consumer Price Index and Personal consumption expenditure (PCE) It includes all items, including volatile categories like food and energy, which can lead to greater fluctuations from month to month.
• Core Consumer Price Index or PCE Core This index excludes food and energy prices, but may still be affected by short-term price movements in other areas.
• The MCT model goes beyond these exceptions and provides a measure of inflation that looks at multiple economic factors and isolates the trend of persistent inflation.

5. Application in economic policy:

• The Federal Reserve and financial markets use the MCT as one tool to assess inflationary pressures and guide decisions about interest rates and other monetary policies.
• This helps policymakers focus on medium- and long-term inflation expectations, reducing overreaction to short-term price fluctuations.

6. Challenges and Considerations:

• Like any other model, the MCT model has limitations, as it depends on the assumptions and variables included in it. There is always a degree of uncertainty in predicting future inflation trends.
• However, by using a multivariate approach, it attempts to provide a more comprehensive view of inflation dynamics than single-scale indicators such as the CPI or the Personal Spending Index.

In short, the New York Fed’s multivariate core inflation trend measure aims to provide a more stable, long-term view of inflation by using multiple economic variables to filter out short-term price fluctuations.