fbpx
May 30, 2022 Reading Time: 3 minutes

The latest release from the Bureau of Economic Analysis shows that prices rose rapidly in April 2022, though not quite as fast as in the previous month. The Personal Consumption Expenditures Price Index (PCEPI), which is the Federal Reserve’s preferred measure of inflation, grew 0.2 percent over the last month. It grew 0.9 percent in March and 0.5 percent in February.

Some will no doubt celebrate the decline in inflation. But a closer look at the data reveals little cause for celebration. The month-over-month decline appears to be entirely driven by the temporary surge in food and energy prices in March. More broadly, inflation remains high.

Figure 1. Personal Consumption Expenditures Price Index, January 2020 – April 2022

Headline and Core PCEPI are presented in Figure 1 alongside a 2-percent growth path projected from January 2020. Headline PCEPI, which includes all prices, grew at a continuously-compounding annual rate of 6.1 percent from April 2021 to April 2022. It has grown 4.0 percent per year since January 2020, just prior to the pandemic. Prices today are 4.7 percentage points higher than they would have been had they grown at 2 percent over the period, in line with the Fed’s average inflation target.

Core PCEPI, which excludes food and energy prices, grew at a continuously-compounding annual rate of 4.8 percent from April 2021 to April 2022. It has grown 3.3 percent per year since January 2020 and is currently 3.2 percentage points above the 2-percent growth path.

As Figure 1 shows, the slowdown in headline inflation does not coincide with a similar decline in core inflation. Supply disturbances—most notably, Russia’s invasion of Ukraine—caused food and energy prices to surge in March. These prices remain high. The BEA reports energy prices were 30.4 percent higher in April 2022 than in the previous year, while food prices were 10.0 percent higher. But they are not growing as rapidly. Food prices grew 1.0 percent in April, compared with 1.4 percent in the previous month. Energy prices, which grew 11.7 percent in March, declined by 2.8 percent in April.

Taken together, the data show that prices continue to grow more or less as rapidly as they were prior to the uptick in March.

Figure 2. Breakeven PCEPI Inflation, January 2020 to May 2022

Forward-looking measures also give little reason to think the inflation tide has turned. Bond traders are currently pricing in around 2.76 percent inflation per year over the next five years and 2.42 percent inflation per year over the next ten years. As Figure 2 shows, breakeven PCEPI inflation—which is measured as the spread between traditional and inflation-indexed Treasuries, adjusted for the average difference between the PCEPI and the Consumer Price Index from 2010 to 2020—has declined over the last month, but remains above where it was in mid-February. On February 15, bond traders were pricing in around 2.69 percent inflation per year over the next five years and 2.28 percent inflation per year over the next ten years.

The Fed increased its federal funds rate target by 50 basis points in May 2022 and looks set to follow with similar rate hikes in June and July. The price level data from April shows no anticipatory effects of the policy. Perhaps we will start to see a lasting decline in inflation next month, but the breakeven PCEPI data suggests bond traders are not convinced. The Fed would need to do a lot more than is currently anticipated to bring inflation—and inflation expectations—back down to 2 percent in the near term.

William J. Luther

William J. Luther

William J. Luther is the Director of AIER’s Sound Money Project and an Associate Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular writings have appeared in The Economist, Forbes, and U.S. News & World Report. His work has been featured by major media outlets, including NPR, Wall Street Journal, The Guardian, TIME Magazine, National Review, Fox Nation, and VICE News.

Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.

 

Selected Publications

Cash, Crime, and Cryptocurrencies.” Co-authored with Joshua R. Hendrickson. The Quarterly Review of Economics and Finance (Forthcoming).

Central Bank Independence and the Federal Reserve’s New Operating Regime.” Co-authored with Jerry L. Jordan. Quarterly Review of Economics and Finance (May 2022).

The Federal Reserve’s Response to the COVID-19 Contraction: An Initial Appraisal.” Co-authored with Nicolas Cachanosky, Bryan Cutsinger, Thomas L. Hogan, and Alexander W. Salter. Southern Economic Journal (March 2021).

Is Bitcoin Money? And What That Means.”Co-authored with Peter K. Hazlett. Quarterly Review of Economics and Finance (August 2020).

Is Bitcoin a Decentralized Payment Mechanism?” Co-authored with Sean Stein Smith. Journal of Institutional Economics (March 2020).

Endogenous Matching and Money with Random Consumption Preferences.” Co-authored with Thomas L. Hogan. B.E. Journal of Theoretical Economics (June 2019).

Adaptation and Central Banking.” Co-authored with Alexander W. Salter. Public Choice (January 2019).

Getting Off the Ground: The Case of Bitcoin.Journal of Institutional Economics (2019).

Banning Bitcoin.” Co-authored with Joshua R. Hendrickson. Journal of Economic Behavior & Organization (2017).

Bitcoin and the Bailout.” Co-authored with Alexander W. Salter. Quarterly Review of Economics and Finance (2017).

The Political Economy of Bitcoin.” Co-authored with Joshua R. Hendrickson and Thomas L. Hogan. Economic Inquiry (2016).

Cryptocurrencies, Network Effects, and Switching Costs.Contemporary Economic Policy (2016).

Positively Valued Fiat Money after the Sovereign Disappears: The Case of Somalia.” Co-authored with Lawrence H. White. Review of Behavioral Economics (2016).

The Monetary Mechanism of Stateless Somalia.Public Choice (2015).

 

Books by William J. Luther

Get notified of new articles from William J. Luther and AIER.
AIER - American Institute for Economic Research

250 Division Street | PO Box 1000
Great Barrington, MA 01230-1000

Contact AIER
Telephone: 1-888-528-1216 | Fax: 1-413-528-0103

Press and other media outlets contact
888-528-1216
[email protected]

Editorial Policy

This work is licensed under a 
Creative Commons Attribution 4.0 International License,
except where copyright is otherwise reserved.

© 2021 American Institute for Economic Research
Privacy Policy

AIER is a 501(c)(3) Nonprofit
registered in the US under EIN: 04-2121305