The American inflationary pressure is falling rapidly.

When discussing inflation, there is often a debate about which price index is the correct one to follow. So I thought – why not use them all?

Thus, I have constructed what I have called an Inflation Pressure Index (IPI), in which I have examined a range of different measures of American inflation, both in a broad and more narrow sense.

I have therefore looked at a total of nine different indicators, ranging from the normal Consumer Price Index and the Federal Reserve’s preferred index (PCE) – and these indices excluding food and energy prices. In addition, I have looked at producer prices, housing prices, and oil prices – as well as wage and money supply growth.

I have de-trended each of these variables using an HP filter and observed how the median of these indices has developed. If the IPI is above 1, then it is an expression of accelerating inflationary pressure, and conversely, if it is below 1, then it is an expression of declining inflationary pressure.

And where is the IPI now?

We see that the IPI peaked in June 2022 – and since then, the index has been falling, and for nearly a year, the index has been below 1.

In other words, it is quite clear that the “inflation episode” from 2021-22 is now clearly behind us.

Therefore, the only thing now can justifying the Federal Reserve not lowering interest rates is if the natural interest rate has increased – something I certainly is not ruling out. But for now at least there is certainly no significant inflationary pressures in the US economy.

In my recent post “2024: The Productivity Boom is Coming” I delved into the fascinating trajectory of our current economic landscape, one that defies the gloomy expectations of a 1970s-style stagnation and instead hints at a revival reminiscent of the booming 1990s. This reflection stems from a detailed observation of recent trends and a hopeful outlook towards 2024.

A Surprising Twist in Productivity Growth

As I’ve monitored the economic indicators closely, the last three quarters of 2023 have presented an unexpected turn. The United States has witnessed an almost 4% annualized growth in productivity, a feat not seen since the dynamic era of the 1990s. This surge in productivity has sparked a debate: Are we on the cusp of a new era fueled by AI and breakthroughs in healthcare, or is this merely a temporary blip?

The Specter of the 70s Versus the Promise of the 90s

The fear of revisiting the economic turmoil of the 1970s — characterized by sluggish growth and spiraling inflation — loomed large in our collective consciousness. Yet, the recent data paints a different picture, one that mirrors the optimism and growth of the 1990s. This period of prosperity was marked by significant advances in technology and productivity, setting a precedent for what we might be entering once again.

In this context, the concept of the natural rate of interest, as introduced by the Swedish economist Knut Wicksell, gains renewed relevance. This rate, which balances price stability with economic equilibrium, seems to be adjusting to a new normal. Higher underlying growth suggests an increase in the natural rate, indicating that the economy can sustain growth without the immediate need for lower interest rates.

The Implications of Sustained Productivity

The prospect of sustained productivity growth brings with it a host of positive implications. It suggests a future where higher real wage increases do not necessarily lead to higher unemployment or inflation — a stark contrast to the traditional economic models. This potential shift could redefine our approach to economic policy and labor market dynamics.

Looking Forward with Optimism

As we stand on the threshold of 2024, the signs of a productivity boom are encouraging. Despite facing challenges such as the pandemic, geopolitical tensions, and inflationary pressures, innovation and technological progress continue to propel us forward. At least this is the case in the US – and less so in Europe.

This resilience and potential for growth evoke the spirit of the 1990s, offering a vision of an economy that is not only recovering but thriving.

In my ongoing journey to decipher the complexities of the global economy, I remain committed to providing insights that bridge the gap between historical economic cycles and the potential for future prosperity. The narrative of a return to the booming 90s, against all odds, underscores a message of hope and resilience in the face of uncertainty.