Here are the updated inflation numbers. Non-shelter core is down to 1.1%, shelter is still at 3.2%, and core CPI inflation is at 2.0%. As IW readers know, the reason this is important is that (1) shelter inflation is largely an imputed figure of rental values of owned homes that involve no cash transactions and, (2) in the era of Closed Access, in some important markets, these transfers have little effect on production.
This is the setup that I worry will cause the Fed to be behind the curve. They believe that merely stopping the rate hikes will be enough. Of course, in this context, the inverted yield curve is also a bad sign in this context.
It's not so much that 1% inflation would be an automatic disaster. I'm not even sure it's a great recession indicator. It's more a problem of being shielded from timely cyclical developments because of misreading the measures that should lead to shifts in policy trends.
It seems that, along with the Great Moderation, has come a peculiar Fed behavioral tick, where the Fed Funds rate is held for some time at a plateau, which is followed by a contraction.
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