Powell's ‘Transitory’ Factors Don’t Explain the Full Inflation Story

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The price categories that Federal Reserve Chairman Jerome Powell said are merely temporarily weighing on inflation actually account for less than half of the recent decline, raising questions about whether central bankers are setting themselves up for another disappointment.

Powell -- speaking at a press briefing Wednesday following the Fed’s decision to leave its benchmark interest rate unchanged -- downplayed a recent slide in U.S. inflation, saying “transitory” factors may be dragging it down. His comments helped reverse a drop in bond yields while sending stocks lower, as investors pared back expectations of a rate cut.

Powell's ‘Transitory’ Factors Don’t Explain the Full Inflation Story

The Fed chief cited categories including portfolio management and investment advice services, clothing and footwear, and air transportation within the personal consumption expenditures price index. Those were among what he called “many little things” depressing a gauge of price pressures that central bankers watch closely to discern underlying inflation trends.

That measure, referred to as core inflation because it strips out relatively volatile food and energy prices, fell four-tenths of a percentage point from December to March -- to 1.55 percent from 1.95 percent. The latest decline was reported Monday, and fueled bets that Fed officials could respond with interest-rate cuts later this year.

Dec. Core PCE ContributionMarch Core PCE Contribution
Portfolio services+0.02 ppt-0.02 ppt
Clothing/footwear+0.02 ppt-0.07 ppt
Air transportation+0.05 ppt+0.01 ppt

“I don’t mean to diminish concerns about too-low inflation, but I think there’s good reason to think that these low readings are particularly influenced by some transitory factors,” Powell said.

“One that I would mention is portfolio management services, which would tend to go down when asset prices go down, with a lag, and so, when asset prices went back up, probably there will be a swing around there, a positive contribution,” he said. “Other ones that get mentioned are things like apparel, and apparel prices were very, very low. There was a change in the methodology. And another one is airfares. There are many little things.”

Powell also mentioned the Dallas Fed’s trimmed mean inflation measure, which is running at about 2 percent. The trimmed mean is an alternative measure of core inflation that strips out a certain proportion of items whose prices have risen or fallen the most in that month.

A closer look at the three categories Powell cited, which account for about 6 percent of the core inflation basket by weight, shows they generated less than half of the recent slide.

Of the 15 major sectors that make up the Commerce Department’s core inflation measure, the contributions from 10 of them fell from December to March. In addition to the items Powell pointed to, a moderation in health-care services inflation had a significant impact.

Prices of all three of the items Powell cited, along with health care, are acyclical, according to a San Francisco Fed analysis. That means they don’t usually rise throughout expansions as the job market tightens, which leaves the Fed with less hope of influencing them than prices that display more cyclical patterns.

Powell's ‘Transitory’ Factors Don’t Explain the Full Inflation Story

The San Francisco Fed’s measure of cyclical inflation has been mostly flat over the last few years -- suggesting tighter labor markets haven’t had much effect on prices -- while the acyclical inflation measure has cooled so far in 2019 after a sharp increase in 2018.

If forecasters can’t rely on tighter labor markets -- their favored predictor of underlying inflation trends -- for a guide as to where the acyclical items Powell mentioned will settle, it may be harder to be confident in a return to the Fed’s 2 percent target anytime soon.

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