Consumer Services Inflation Cycle Matters The Most: Fed Tightening Cycle Far From Over
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Summary
Last month, although overall headline consume prices fell 0.1%, consumer prices for services rose 0.4%. Since consumer services account for 70% of the overall price index (and 58% excluding energy services), that's the price cycle the Fed needs to crack before it can be confident that overall inflation is slowing to its 2% target.
Breaking consumer services price cycles take time and significant increases in official rates. Since the mid-1980s, consumer services inflation cycles have reversed after the federal funds rate exceeded the inflation rate, sometimes by substantial amounts. At the end of 2022, the Fed was far from reaching the level of official rates that broke prior inflation cycles.
That's because consumer services, excluding energy services and core consumer services less shelter, posted year-on-year increases of 7% and 7.4%, respectively, in December. So the current fed fund rate range of 4.25% to 4.5% is still 300 basis points below consumer services inflation.
The financial markets are betting that the Fed has little more to do to reverse the inflation cycle, while history says there is much more to do. Who's right? I bet the historical pattern between inflation and the fed policy repeats itself; investors, beware.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.