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One Inflation Number – Oversimplified

December 01, 2022

There are a lot of inflation numbers seen in the press but how much of it is accurate, predicative of the future, etc.

We all know unexpected events impacted the economy over the last few years.

  • COVID
  • Ukraine
  • Supply chain difficulties
  • Demand outstripping supply

These are transitory in nature but exploded at similar times.

Let’s make a distinction between transitory inflation and underlying inflation. Investopedia defines headline inflation as “the raw inflation figure reported through the Consumer Price Index (CPI) while underlying inflation looks at the economy’s prices as a result of supply/demand. According to FEDS Notes, “underlying inflation is the rate of inflation that would be expected to eventually prevail in the absence of economic slack, supply shocks, idiosyncratic relative price changes or other disturbances.”

Put in lay terms, if you get rid of the shocks inflicted randomly, we should be able to calculate the underlying inflation rate.

JP Morgan Chase, delving into the headline inflation numbers, believes from September 2022 – September 2023, inflation will fall to 3.2%.  UBS predicts 2% by December 2023. According to Intercontinental Exchange, their headline prediction for late next year is 2.9%.

We don’t know if they are right but we like the trend to lower inflation.

*Based on an article from The Wall Street Journal, “True Inflation Rate Proves Difficult to Discern”

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