CPI inflation, the index value last year is just as important as the value for this year

June’s Consumer Price Index (CPI) was released this week. Inflation is now running at 3.0%. It continued this year’s underlying trend of lower inflation. Hurrah! 

But mid-year is likely to be the inflection point toward higher inflation reports into year-end. 

CPI inflation is reported year-over-year as an annual percentage increase or decrease. Thus, the annual inflation rate for each month is the percentage increase of this month’s CPI Index over the CPI Index for the same month last year. As a result, the index value last year is just as important as the value for this year.

The second half of 2022 experienced a stall for the CPI Index. As shown in Figure 2, inflation as a percentage remained high across 2022 because of the relatively low CPI Index for each respective month of 2021. 

The “Stall” in 2022 set the stage for a late 2023 increase in the CPI inflation rate.

As a result, inflation is structurally biased to increase through the rest of 2023. 

Each month will bring more press reports and analyst speculation that challenge the Fed to act before the inflation fire gets out of control again. The constant negative message could weigh on the financial markets.

John Mauldin 14 July 2023

https://www.mauldineconomics.com/frontlinethoughts/flip-side-of-the-inflation-coin