Fed's Inflation Metrics Lags Behind Reality

The Federal Reserve is often criticized for being slow to respond to changes in inflation. This criticism is based on the fact that the Fed relies heavily on measures of inflation that summarize the preceding 12 months, which can be slow to reflect sharp changes in the current inflation run rate.

One example of this is the Consumer Price Index (CPI), which came in at 3.4% in July, slightly below June's figure of 3.5%. However, when looking at the trend over the past three months, the annualized CPI is just 0.49%, suggesting that inflation may already be under control.

The Producer Price Index (PPI) also shows a similar picture, with prices up 4.7% year-over-year, but negative on a monthly basis since April. This suggests that producer prices are not driving consumer price increases, and that the trend of inflation is actually reversing direction more quickly than the YoY version of the CPI can detect.