Inflation Moving Higher

The Cleveland Federal Reserve’s Inflation Nowcasting model has increased the January 2023 CPI estimate to 0.58 percent. The estimated Q1 2023 annualized rate rose to 4.79 percent. Importantly, core CPI for Q1 annualized is higher at 4.83 percent. Core PCE is at 4.05 percent.

Why is this important? At 0.6 percent, the inflation rate will match that of 2022. Most investors expect inflation will fall this year. They also expect the 12-month inflation rate will crater because most of 2022’s inflation came from January to June. If inflation continued on the same pace as July to December, the 12-month CPI would drop below 3 percent by June. The Cleveland’s Fed forecast, if accurate, kills the odds of that happening.

Finally, if the inflation rate is stuck up around 4 to 5 percent, the Federal Reserve has to go well above 5 percent to get restrictive, perhaps beyond 6 percent.