US inflation broadening risks are materializing, but the extent remains far from crisis levels.
Recent research from Goldman Sachs economist Jessica Rindels indicates that, measured by the Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, the current breadth of inflation is above the historical average from 1990 to 2019, particularly notable under a weighted methodology. This finding aligns with concerns expressed by new Fed Chair Wash during last week's congressional testimony, where Wash explicitly listed preventing the "broadening" of individual price increases as a top priority.
However, Rindels's study also provides a crucial reference point: on a custom quantitative scale of 0 to 10 (where 0 corresponds to the 1990-2019 average and 10 to the 2022 inflation peak), the current inflation breadth reading is 6 under the weighted methodology and merely 2 under the unweighted methodology, both significantly lower than the extreme levels seen during the pandemic. Market reaction has been relatively muted, with S&P 500 futures rising approximately 22 basis points in Monday's pre-market trading.
Quantitative Framework: Measuring Inflation Breadth
Rindels employs a triple-filter method to construct the analytical framework:
Using PCE as the foundational data source, applying a six-month annualized change rate to smooth short-term volatility, and conducting statistics under two methodologies: weighting each component by its share in PCE (weighted) and treating each category equally (unweighted).
Within this framework, inflation breadth is defined as the proportion of PCE components experiencing price increases exceeding 3%. The weighted reading of 6 suggests that, based on consumption weights, the current degree of inflation broadening is close to 60% of the 2022 peak. The unweighted reading of only 2 indicates that price increases remain relatively concentrated in terms of the number of categories and have not spread comprehensively.
The significant divergence between the two methodologies indicates that current inflationary pressures are primarily concentrated in higher-weight consumption categories rather than being uniformly distributed across all sectors.
Price Increases Concentrated in Audio-Visual, Financial, Healthcare, and Transportation
Rindels's research points out that the sectors with the fastest current price increases are concentrated in four major categories: video/audio services, financial services, healthcare services, and airfare/transportation.
These categories hold relatively high weights in the PCE basket and are the primary drivers behind the elevated weighted breadth reading.
In contrast, while housing rent remains a significant component of inflation, Rindels predicts its influence will gradually diminish—forecasting that its year-over-year increase will fall below 3% by the fourth quarter of this year, at which point its contribution to overall inflation breadth will weaken notably. This projection provides a degree of forward-looking relief for markets.
Market Pricing: Rate Cut Expectations Cool, September Hike Probability Rises Above 50%
Wash's congressional testimony last week was widely interpreted by markets as having a hawkish tilt.
Subsequently, the yield on the 2-year US Treasury note retreated slightly from near 4.3% to 4.18% on Monday, suggesting a market correction after digesting the remarks.
According to CME FedWatch data, traders currently assign an 85% probability that the July policy meeting will leave rates unchanged, but the probability of a 25-basis-point hike in September has risen to 52%. This implies the market has priced in one additional rate hike as a baseline scenario, with the persistence of inflation broadening reshaping expectations for the Fed's policy path.
For investors, the core tension in the current situation lies in this: while inflation breadth has exceeded historical norms, it has not yet triggered systemic risk; expectations for policy tightening are heating up, but the pace remains uncertain. Whether housing rent cools as anticipated will be a key variable for observing inflation trends in the second half of the year.
Comments