BlackRock Investment Institute

Macro insights

Explaining the “transitory” dip in U.S. inflation

May 14 – Our analysis suggests that inflation may edge back up to mid-2018 highs this year. This would reduce pressure on the Federal Reserve to make a pre-emptive rate cut. 

US core CPI and BlackRock's trimmed mean CPI estimate, 2011-2019

Sources: BlackRock Investment Institute, with data from Thomson Reuters, May 2019. Notes: This chart shows the 12-month changes of the US core consumer price index (CPI) and BII’s trimmed mean CPI estimate. This excludes the items in the CPI basket that moved the most each month (in either direction) and therefore attempts to capture the slower-moving underlying pace of inflation.

U.S. core CPI inflation has decelerated from a high of around 2.25% in mid-2018 to just above 2% in the April 2019 reading. This steady deceleration has sparked some concern around whether price pressure can be sustained at the Federal Reserve’s target of a 2% annual change in the price index for personal consumption expenditures (PCE). March’s core PCE rate was 1.6%.

At the beginning of May, Fed Chair Jerome Powell said that the decline in inflation has largely been driven by “transitory” factors that ought to fade over time. Items such as apparel, medical care, and portfolio management fees (which fell following market sell-off at the end of 2018) have been major downward contributors and appear to be temporary in nature.

A more systematic way to gauge the underlying rate of inflation suggests that the “true” latent rate of inflation has stabilised and is beginning to accelerate. The chart above shows actual 12-month core consumer price index (CPI) inflation (green line) and our trimmed mean CPI estimate (orange line). The trimmed mean estimate excludes the items in the CPI basket that moved the most each month (in either direction) and therefore attempts to capture the slower-moving underlying pace of inflation. This has ticked back up to the 2.25% level. This would suggest that – unless there are further downside shocks to inflation – core price pressures could edge back up into this range through the course of the year. All else equal, this in turn could reduce expectations of a pre-emptive rate cut by the Fed to address subdued price pressures.