With the switch to the 2012 reference, the new fixed dollar comparison makes revisions in the PCE Deflator a bit springier. Lows are a little lower; highs a little higher. At the bottom in 2009 (July), for example, the 2009 reference says consumer price inflation was -1.18%. This new 2012 reference says it was -1.24%. For June 2009, the difference in benchmarks was worth -11 bps; -0.71% previously compared to -0.82% now.
Conversely, at the top of the reflation cycle in 2011, inflation is just a bit higher now. The deflator under the 2009 reference dollar never got above 3%, peaking just below in August and September 2011, 2.86% and 2.93%, respectively. The 2012 dollar instead pushes both months above that level, now 3.001% and 3.06% August and September respectively.
These are not big changes, of course, little more than splitting hairs. But when you are just straddling an artificially determined boundary they can be. Under the 2009 benchmark all the way through May 2018, the PCE Deflator had managed 2% or better only twice in six years. With a springier benchmark dollar reference, the narrative completely changes – four months in a row including June 2018.
From the perspective of the FOMC, this is a big deal. It’s exactly why Ben Bernanke is in the news again claiming to not bother about the yield curve(s). For Economists, this is it, their 2 and 5 point actually achieved. When the PCE Deflator was frustratingly, fractionally below 2% they had to use the future tense when talking about full recovery.
Now? It’s here. What a difference 10 bps can make.
In reality, the analogy I used last week to describe the benchmark changeover applies in this context to describe what’s really happened in the economy. Nothing.
If your work commute is twenty miles but the government tomorrow says that a mile is ¾ what it used to be, your drive might be numerically longer but you’ll be using the same amount of gasoline no matter what.
Two and five is 2% inflation and 5% unemployment; the orthodox, Phillips Curve threshold for full and complete economic recovery. Policymakers believe there is significance at this economic point, the moment of policy equilibrium that defines the boundary between needing accommodation and full removal of it.
Markets aren’t buying it. They did, minimally (thus, hysteria) late last year. Then 2018 happened.
For one, it’s no longer 2 and 5, it has become 2 and 4 (or less than 4). Somebody really needs to explain how we can be at 4% unemployment and still require a favorable benchmark shift in order to just barely squeak above 2%. In other words, the market doubt is that what is being suggested isn’t sustainable whether inflation really is a few bps above according to the 2012 reference or a few bps below according to the 2009 reference. There is no difference in either case.
The economy is still using the same amount of gasoline for its painfully slow economic commute. That’s what the curves are saying – this isn’t likely to end any differently than the last time, or the one before that.
What is moving inflation indices is not QE’s nor rational expectations manipulations (via QE’s), rather it is the same thing that moves the global economy into, or out of, a downturn.
These negative eurodollar signals that have spread all throughout the global economic system (commodities, in particular) in 2018 are suggesting that four months in a row at 2% (or ten months at near 2%, same thing) are as likely to be all there is to this round of “recovery.” It’s all the same unbacked talk; underneath there is the deflation signal, meaning that the focus on exactly 2% is and always was misplaced.
It’s not the exact level that matters rather the tendency to be meaningfully above or below it. Over the last ten years far more often (and it’s not close) than not the PCE Deflator (as CPI) has been significantly less than 2% than either close or slightly above. Under any typical (meaning: historical) inflationary breakout the initial stages are clear and unambiguous, not meandering with lingering downside habits. Even oil isn’t helping all that much.
What I wrote a few months ago closer to the past inflation hysteria still applies. Then, initial estimates (still the 2009 reference) had put the PCE Deflator above 2% for the third time in 72 months. Now, under new benchmarks, it’s a benchmark-driven four in a row and still here we are.
The FOMC should not, and likely does not, at least in private, expect the 2% mandate to hold until this one crucial part changes. They keep saying that it will, and we keep waiting for it to show up. Like the two in 2017, a third oil-driven PCE Deflator takes some of the pressure off but it’s still missing the actual boom and not really close enough to kick off one.
This is why on a day when the 2 and 5 appears to have finally happened, the bond market just shrugs. Barely anyone notices when eight months ago it would have been pure bedlam (especially over at the Bloomberg newsfeed). Maybe people don’t exactly know the how’s and why’s just yet, but they have seen enough over the past ten years to have a decent enough idea how the (euro)dollar rules these things. Not Economists and their arbitrary definitions.
In late 2010 and early 2011, the PCE Deflator put together a string of 14 in a row.