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We Found a 2% Price Inflation Measure

CAMS Weekly View from the Corner - Week ending 10/13/23

October 16, 2023

We have shared throughout numerous editions the Federal Reserve has a long standing price inflation objective of 2% per year. They consider a perfect world relative to price inflation to be consistently 2% and have stated this in recent decades.

The current Fed Chairman (Powell) has steadfastly held to this objective throughout our current price inflation era even as X reporter along the way has prodded and pushed whether they would relent from this objective and move it to 3% for example.

The obvious motive here is if 2% becomes a 3% objective then interestingly we have no price inflation issue relative to interest rate policy from the Fed and we are then that much closer to expecting rate cuts.

As an aside, if they ever do relent to a 3% price inflation objective look out fellow citizen.

The asset holder in you may be happy but the citizen in you will experience a different reality from the general prices you will be incurring to living in a society where income inequality moves from bad to let’s say horrific and all the negative socioeconomic storylines that follow from those two placed together.

For Powell’s part he has vehemently stated that will not be happening. For us long-term Fed observers we have learned to always take what the Fed states with a grain of salt because what they oppose can turn to support rather quickly – using their history as our guide.

It is probably this underlying experience with the Fed’s history that prompts the 3% questions because few trust their steadfastness.

This coupled with the fact that price inflation is not going away with ease as so many predicted and expected. This has led to “higher for longer” interest rate policies in light of how embedded price inflation has become in the societal storyline.

Consumer Price Index

We have seen the Consumer Price Index (CPI) and all its sub-components updated as of a few days ago. The bottom line comes down to pretty much the same – for the most part continued deceleration in the growth level of prices and yet still far north of the Fed’s 2% objective. With this the higher for longer mantra remains solidly in place. That is unless the Fed does the unthinkable as shared above.

Speaking to our subject title we will share what we found while viewing the data streams around the CPI universe with a tongue-in-cheek tone: “We found a 2% price inflation measure.” So we share below what we discovered.

As shared the CPI universe of price data offers various views of the price inflation storyline for society. We date the above chart back to the beginning of this century (2000) for some historical perspective.

The above measure is Consumer Prices with Shelter related pricing taken out of the mix. With this the most recent update reflects exactly 2%.

To be clear we are not data mining here for a desired outcome rather share this view in light of our perusal of the data trove and upon seeing thought it was worth a discussion.

In many ways, yet again, the above underlines just how far away we are from the Fed’s 2% objective.

When we fully realize that shelter related costs represent the literal basics of living (along with food and water) we are drilled down as deep as we can get and with this we only achieve the upper bound of the Fed’s 2% target.

The Fed’s previous massive money printing bouts along with zero interest rate policies have done significant damage to society relative to asset pricing in particular shelter and shelter related costs.


We have shared Services pricing throughout numerous editions underlining its importance. Realizing Services represent a tremendous percentage of the U.S. economy it is an area that receives a lot of attention. For his part Chairman Powell has spoke to this area’s pricing stickiness numerous times during our current price inflation era.

In working through the CPI data trove and after viewing the CPI less Shelter costs metric (shared above) we were curious how CPI Services less Shelter looks with the most recent updated data.

The above also dates back to year 2000 for some 21st century perspective. To the right we see the acceleration and then follow-on deceleration in the growth in prices for CPI sub-component Services. Again, this is Services with shelter costs removed.

Our current read is 2.8% which is still the highest growth rate we have seen in the previous decade-plus. Underlining how sticky Services price inflation is even with shelter removed we remain well north of the 2% price target which is noted with our red horizontal line.

For perspective overall Services price inflation (with shelter related included) is registering 5.2% as of the most recent update. Obviously this reading is miles north of the 2% target and is the highest read we have seen since June of 1991.

All told with the most recent update of the Consumer Price universe we continue to see that we are living within an embedded price inflation era that is staying with us. The question we continue to ask is will it take a recession, as in prior price inflation eras, in order to aid in reducing pricing inflation down to target objective levels?

This is unanswerable at this point but it seems more likely than not that recession will play a role in this price inflation era.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


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