Expect Wild Swings In Month-Month Inflation To Continue | by Richard Cervisi | Aug, 2022 | Medium

https://medium.com/@rcervisi/expect-wild-swings-in-month-month-inflation-to-continue-4e50489309bc

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July’s month-to-month change in the Consumer Price Index (CPI) is reported today to be 0.0%, while June’s value was 1.3%. What is going on?

Statistics show that month-to-month inflation is typically “sticky”, but not always. High incremental inflation one month usually leads to high inflation the next, and a low value leads to another low value. Periodically however, there can be significant deviations from this trend.

The figure shows the relationship between this month’s incremental growth in CPI (vertical axis) and last month’s growth (horizontal axis). Two time periods are depicted: the 875 months from 1947 until the beginning of the pandemic in 2020; and the 30 months since the pandemic began. In both periods, the relationship between consecutive months is a positive correlation and explains about 30% of the month-to-month change.

However, there are also significant deviations from the trend lines in both periods. July 2022 is indicated. There was only a 1.4% probability that the incremental inflation rate would be zero, but 1.4% leaves the door open, and there are several close neighbors.

We are in a period of significant volatility that is comparable to several economically painful periods in the past. The pandemic has been ongoing for 30 months now (about 2 and a half years). The graph plots the 30-month standard deviation of month-to-month CPI values going back to the 1940s.

The end of World War II, the Organization of Petroleum Exporting Countries (OPEC) oil embargo in 1973 and 1974, and the Great Recession created significant volatility. The 1979 oil crisis coupled with two early 1980’s recessions also created substantial volatility. Today we are dealing with multiple economically significant events too, i.e., the pandemic and the Russia and Ukrainian war.

We should expect more month-to-month inflation volatility