Settling In

At long last, we get an inflation report in which the expenditure-weighted distribution of individual price changes in the Consumer Price Index is almost centered on the actual average rate of inflation: 

   

   

In case you haven't been following the saga of why we might actually care about that, April was the first month this year -- in quite some time, in fact -- that the majority of prices that contribute to the CPI haven't been rising in excess of 3 percent.  That was making me (and others) a bit nervous about which way the inflation scales might eventually tip.  For this month at least, things have settled in the right direction. 

In his regular inflation update, Brandeis professor (and former NY Fed senior VP) Steve Cecchetti explains why he thinks April's tip is likely to have staying power:

My favorite indicator of the medium-term inflation trend, owner equivalent rent (OER), continued to moderate, rising a mere 2.1 percent (a.r.) for the month ? well below it's recent readings that have been in excess of 4 percent.  Regular readers of this update may recall last year when I was warning that rises in OER would eventually push core inflation over 3 percent.  Well, that hasn't happened and I have a theory about where I went wrong.  At the time, my logic went like this: Over the past 5 years, resale prices of houses have risen far faster than rents, opening up a significant gap between the two.  My sense was that house prices were likely to languish, perhaps even fall modestly, so that the lion's share of the gap would be closed by a step-up in the rise of rents.  What I failed to see was that the combination of a high inventory of unsold new homes, combined with increased mortgage defaults could flood the rental market.  It is the glut of rental houses that is holding OER down now and is likely to continue to do so in the foreseeable future.  The result will be falling CPI inflation.

Falling to where is the relevant question I suppose.  The return to a more normal price distribution has brought the median CPI measure of core inflation back in line with other core measures, which are giving pretty consistent signals that the trend rate of inflation is in the 2 to 2-1/2 percent range:

   

So, it does feel more and more like the threat of rising core inflation is passing.  On the other hand, it doesn't feel much like the promise of falling core inflation is waxing.  Is that good enough?