and Median inflation continue to decline. This is not really a surprise; since early 2023 the clear direction has been to lower inflation. The debate has not been about whether inflation was heading higher or lower. The debate has been about whether the downtrend was going to converge on 2% as the Fed’s target, or fall short of that level. For at least that long, my position has been that median inflation would settle in the “high 3s/low 4s.” To date, nothing has happened to change that view.
For Median CPI, the sharp acceleration took off from August 2021 at 2.4% and extended 18 months until it reached 7.1% in February 2023. In the 15 months since then, median has declined only to 4.3%, and this rate of improvement appears to be flattening out rather than accelerating. The optimistic view is that we have had more months of decelerating inflation than we had of accelerating inflation. The more realistic view, especially considering that Median CPI hadn’t been above 3.33% for 28 years prior to COVID is that inflation is converging to the mean…but to a different mean. This is what I have argued was happening: the perturbation to the former equilibrium displaced the whole distribution to a new equilibrium .
In this equation, the economic variable is represented by the time series S, the long-term mean is μ, and the mean reversion rate is k.Because there is also random noise, and because many economic series don’t tend to see large perturbations on a regular basis, it is not a trivial thing to pick out the long-term mean and the reversion coefficient from the noise.
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