Inflation reports often have multiple interpretations for observers to predict the true underlying patterns of price growth, including core inflation excluding food and energy, and so-called super-core inflation—which measures service prices excluding housing and rental costs.
The Cleveland Fed has also compiled a measure called the median CPI, which measures the inflation rate of components whose expenditure weights are at the 50th percentile of price changes. There is also a more complex 16% trimmed mean CPI, which measures all components except for the hottest and coldest ones.
These indicators serve different purposes.
For Federal Reserve Governor Waller, what matters is the breadth of inflation. That is, how many components are experiencing rapid price increases, how many are experiencing slow price increases, or are showing a downward trend. Waller's comments often influence the market.
In his critical speech titled "The Time Has Come" given in September (at which point he meant that it was time for rate cuts, and the Fed would begin cutting rates less than two weeks later), he mentioned the number of components with an inflation rate below 2.5%.
But that is not the case now. Waller and his Federal Reserve colleagues are currently in a quiet period where they are prohibited from discussing monetary policy. Vanda Research global macro strategist Viraj Patel shared a post on social media indicating that what he calls the Waller Rule is trending upwards.
The number of components with an inflation rate below 2.5% is increasing.
"The breadth of inflation is high, especially in November," Patel said. "What is concerning is that the six-month trend is gradually entering the seasonal active period for inflation."
Patel says he is measuring the Waller rule by looking at the detailed spending categories mentioned by the U.S. Bureau of Labor Statistics.
Regardless of the advantages of the Waller rule, market participants overwhelmingly expect the Federal Reserve to cut rates next week. According to the CME FedWatch tool, based on interest rate futures trading, the probability of a 25 basis point rate cut later this month is 96%.
Waller himself has also indicated in recent public comments that he is inclined to support rate cuts.
He stated before the employment and CPI data was released: "Policy remains sufficiently restrictive that an additional rate cut at our next meeting would not significantly alter the stance of monetary policy, and there is enough room to slow the pace of rate cuts if necessary to ensure we are moving towards our inflation target. That is, if the data we receive before our next meeting is unexpected, suggesting that our forecasts for a slowdown in inflation and a still robust economy are incorrect, then I would support keeping the policy rate unchanged."
Article reposted from: Jin Shi Data