A significant drop in the annual CPI inflation rate is expected in the USA

The annual CPI inflation rate is defined by the total change in the Consumer Price Index and the CPI value one year ago. With growing CPI, a constant annual change in the CPI produces decreasing inflation rate due to the increasing denominator. The jump in the CPI ( see Figure 1) from August 2021 to May 2022  produced a dramatic surge in the inflation rate (Figure 2). The inflation increase in the first quarter of 2021 was related to the drop in the CPI and the corresponding fall in the inflation rate denominator in the first quarter of 2021.

Figure 1. The CPI in the USA between January 2015 and October 2022. 

Figure 2. CPI inflation rate in the USA

As we mentioned in our previous posts (here and here), the CPI evolution during the COVID-19 pandemic is driven by printed ("helicopter") money - several trillions of dollars poured into the US economy in 2020 and 2021. The consumer prices just accommodated the money in a price level increase. The lag behind the money insert and the CPi reaction is approximately one year and Figure 3 repeats the same picture in the previous post from Nov 13.  In Figure 3, one can see that the monthly CPI inflation rate for Nov 2022 should drop and the annual inflation rate has to fall as well. 

Figure 3. The current CPI (blue dots) was delayed by approximately 1.25 years behind the money injection. The shifted CPI (red dots) is synchronized with the money injection as expressed by the Personal Income.  In the near future (likely in 2023Q1-2), the CPI will fall below the zero line.

Figure 4 presents the difference in the CPI annualized inflation rates: current and 12 months ago. This difference indicates the trend in the CPI inflation evolution. The negative values mean that the CPI inflation falls as was observed between July and October 2022. The estimate for November 2022 will be released by the BLS on Dec 13. The trend in Figure 4 indicates that the CPI inflation will drop below 7% and this means that the FOMC will retain the overnight rate rather than increase it by 0.75 percentage points. The trend will extend into 2023 as all printed money is fully accommodated by the CPI and there is no pressure left to inflate the babble. In 2023, deflation is coming as the Personal Income falls below its long-term average.   

Figure 4. The difference in the CPI annualized inflation rates: current and 12 months ago.