Tracking the Fed’s Progress on Disinflation

Headline inflation, which refers to the 12-month increase in the Consumer Price Index (CPI), increased 9.1% in June 2022 — the highest rate since 1981 — before the U.S. economy began the fraught process of disinflation.¹

Disinflation means the rate of inflation is decreasing. Prices may still be rising overall, but at a slower rate than before. It shouldn’t be confused with deflation, which means the inflation rate is negative, because prices are generally falling.

The Federal Open Market Committee (FOMC) is raising the federal funds rate in a steadfast effort to reduce consumer demand and bring inflation down to its 2% target. Along the way, many economists, businesses, and investors are watching key inflation measures for signs of easing price pressures.

Of course, almost everyone is wondering how quickly the rate of inflation will fall back to normal and how high interest rates will rise in the meantime.

Where to Look

The CPI tracks the cost of a fixed market basket of goods and services purchased by consumers. As such, it captures the prices paid for the same items over time, but it does not reflect changes in consumer behavior and can be unduly influenced by extreme price swings in specific categories. Core CPI strips out volatile food and energy prices.

The Fed’s preferred gauge for its 2% target is the Personal Consumption Expenditures (PCE) Price Index. The PCE price index is even broader than the CPI, and it adjusts for shifts in consumer behavior, such as when shoppers purchase less-expensive items instead of others that become too expensive.

The Producer Price Index (PPI) measures the wholesale prices that producers charge businesses and others for goods and services. A set of underlying indexes captures prices through all stages of production — for raw materials, intermediate goods (used to produce other goods), and finished products. The PPI is often considered an early warning of inflation pressures, but it does not always anticipate changes in retail prices.

Not Your Typical Gauge Gap

In late 2022, the difference between annual inflation as measured by the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) Price Index was the widest it has been since the 1980s.

12-month change in prices



Sources: Bureau of Labor Statistics and Bureau of Economic Analysis, 2023 (data through April 2023)

Underlying Trends

In addition to the overall inflation rate, price indexes have revealed — and obscured — some meaningful trends in specific corners of the U.S. economy.

Goods deflation. With most supply chain issues resolved and global shipping costs back to pre-pandemic levels, the prices of many goods have stabilized, and some have begun to fall. For the three months ended January 2023, core goods prices fell at an annualized 2.1% rate.²

Services inflation. Meanwhile, consumer demand has shifted back to services. A competitive labor market has also pushed up workers’ wages, which represent a larger share of costs for businesses in service industries.³

Shelter’s influence. Housing costs make up about one-third of the Consumer Price Index by weight, and they were responsible for more than 54% of the rise in core CPI in April 2023.⁴ New rents and home prices have been slowing since mid-2022, but because of the way data is reported, it can take nearly a year for those changes to be reflected in the CPI. Shelter costs have less impact on the PCE price index, where they account for just 15%.⁵

These trends have drawn attention to a metric dubbed “supercore” services inflation, which excludes food, energy, goods, and shelter. Supercore was running at about 4.6% in April 2023, lower than the core CPI of 5.5%, but still well above the Fed’s target.^6–7

When setting monetary policy, Fed officials must sift through a wide variety of price data, in addition to surveys of inflation expectations — which indicate consumers’ confidence in the Fed’s ability to control inflation. The committee must also consider how rate hikes might impact employment.

1, 4, 6) U.S. Bureau of Labor Statistics, 2023
2–3, 5) The Wall Street Journal, February 14, 2023
7) Bloomberg, May 26, 2023

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