CPI Growth Is Set to Slow Even More

Inflation growth is rapidly closing in on the Federal Reserve’s 2% target.

One of my favorite parts of every morning is drinking coffee. After my espresso maker warms up, I look forward to making two lattes, each with an extra shot of espresso. It has become such a part of my routine that often, I feel like my day can’t get started without it.

Prior to COVID, the routine was a little different. Back then, I still looked forward to my daily coffees, but instead of making them, I enjoyed walking out to purchase them. I would come into the office, get my morning work done, and then shoot out to see my favorite barista and a hot cup of joe.

That all changed when I first came back to the office. You see, before the break, I was spending about $10/day or $5/cup. But the first thing I noticed when I grabbed my initial coffee was the price had jumped to $7.50. While the $5/cup didn’t really bother me before, because it had been that price for years, this price increase did.

Soon, I was cutting back to going out for just one cup a day. And, before long, it was only a couple of cups a week. After saving all that money from making coffee on my own, the 50% jump in price per cup was like a punch in the face. I no longer saw the need for it.

Well, I was recently pressed for time and couldn’t make coffee on my own. So, I stopped in to grab a latte. And when I paid for it, I noticed the price was still the same. I’m sure many of you, like me, are experiencing similar situations. After seeing prices for all types of goods shoot up after the pandemic, you’re less willing to waste as many of your hard-earned dollars on buying them.

Later this week, the U.S. Bureau of Labor Statistics will release inflation growth metrics for September. And when that number is reported, it will show price pressures have hit their lowest level since February 2021. The change will support more rate cuts by our central bank, underpinning a steady rally in risk assets like cryptocurrencies.

But don’t take my word for it, let’s look at what the data’s telling us.

Every month, the Dallas, Kansas City, New York, and Philadelphia Feds ask manufacturers in their districts about the state of activity. The questionnaires ask those companies about things like new orders, lead times, employment, and production. It asks whether the costs are rising, falling, or unchanged.

But we must focus on “prices received for goods.” The number indicates what customers pay manufacturers for their finished product. It’s akin to CPI. So, the direction of prices received is an indicator of whether inflation is rising or falling.

Now, the states where those four banks are headquartered – Texas, Missouri, New York, and Pennsylvania – account for roughly 25% of domestic economic output. So, we can get a decent idea of national demand. But the results come out ahead of CPI, so it’s like having an early look into the data.

And the latest readings indicate prices received fell…

In the above chart, I combined the readings from the four central banks into a single gauge. It’s called the combined prices received index (CPRI) and is represented by the blue line. I then compared it to CPI (orange line). As you can see, CPRI tends to be a leading indicator. It peaked in October of 2021. Yet, it wasn’t until June of 2022 that CPI finally reached a 40+ year high before starting to roll over.

As you’ll notice in the above chart, my index held a steady trend throughout 2019 and the start of 2020. Inflation growth followed suit, remaining under 2%. But then, when businesses sent workers home during the pandemic onset, the CPRI gauge dropped. And, as the economy reopened, it took off. In each instance, we see that CPI does the same, but on a lagged basis.

Now, it appears the CPRI trend is stabilizing. You can see this by looking at the right side of the above chart. This is happening as we’ve seen consumers’ excess COVID savings evaporate and spending slow. That means individuals are becoming increasingly price conscious and hanging onto more of their money.

In December 2023, the gauge had a reading of 8.4. This past month the number was 8.8. In fact, so far this year, the index has held in a range between 5 and 10. This is important because the longer it holds steady, the more likely it is that inflation growth will slow. Because the annualized reading will drop the older numbers that are higher, helping to bring the CPI back below the 2% goal.

Over the last three months, inflation has grown at a pace of 0.1% per month. If that rate continues moving forward, we could see annualized growth drop to 1.5% by March 2025.

As you can see, the regional central bank’s economic team anticipates headline CPI will fall from 2.5% in August to 2.3% in September. That would mark the lowest reading since March 2021, when the numbers began to explode higher.

Like I said at the start, price growth is moderating. Manufacturers are telling us they’re having a harder time pushing price increases on to consumers. And, if my model is correct, we will see inflation growth come back to 2% sooner than later.

So, don’t be surprised when the report later this week confirms what my indicator’s telling us. Easing price pressures should increase the Fed’s conviction that inflation growth is slowing. That will give the central bank room to lower interest rates even more. The change will act as a tailwind for a steady long-term rally in risk assets priced in dollar terms, including bitcoin and ether.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.