Why core inflation stopped falling

The publication of April’s consumer price index delivered a headline inflation rate that moderated to 4.9 per cent year-on-year—the first sub-5 per cent print in two years. Yet fixed-income desks and central bankers found zero reason to celebrate, as the core CPI print, stripping out volatile food and energy components, printed at an uncomfortably sticky 5.5 per cent. More significantly, the three-month and six-month annualised trends in core inflation have completely stalled, moving sideways in a stubborn band between 5.0 and 5.5 per cent since the start of the year. The initial, easy phase of disinflation has terminated, leaving monetary authorities confronting the structural citadel of services inflation.

The stalling of core disinflation was entirely predictable to anyone who analyzed the underlying components of price formation. The dramatic disinflationary momentum of late 2022 was driven almost entirely by the violent rollover in core goods prices, as shipping costs normalized and retail clearance sales cleared excess inventory.

The Limits of Goods Deflation

By April 2023, however, core goods deflation had largely exhausted its statistical impulse. Goods prices leveled off, removing the negative monthly drag that had masked the persistent strength of domestic services.

At the same time, core services ex-housing continued to compound at a monthly pace north of 0.4 per cent, driven by unyielding wage growth in healthcare, professional services, auto insurance, and hospitality. Shelter inflation, while showing signs of peaking, continues to work through the official indices with glacial slowness.

The Structural Impasse

This dynamic leaves the Federal Reserve trapped in an institutional cul-de-sac. Pushing inflation from 9 per cent to 5 per cent was relatively straightforward; it required only the clearing of supply-chain bottlenecks and the decline of global commodity prices.

Compressing core inflation from 5.5 per cent down to the 2 per cent statutory target requires something far more painful: the destruction of domestic service demand and the loosening of the domestic labour market. Core inflation has stopped falling because goods disinflation has run its course; getting inflation back to two per cent will require driving the real economy into an unforced slowdown that the Federal Reserve has so far been reluctant to engineer.