Inflation pressures were tamed a few years ago

A quick note on the latest inflation data through April '25.

Chart #1

Chart #1 shows the total and the core (ex-food and energy) measures of the Personal Consumption Deflators. The PCE deflator is a better measure than the CPI, because the weightings of its components are dynamically adjusted to account for changes in consumer behavior. Both measures are within spitting distance of the Fed's target—the PCE deflator rose only 2.1% in the year ending April '25. The big-picture takeaway here is that the surge in inflation which occurred in the wake of the Covid crisis ended in mid-2022. It's all over but the shouting.

Chart #2

Chart #2 shows the three major components of the PCE deflator. Note that durable and non-durable goods prices have been essentially flat for the past 2-3 years. In particular, raw industrial commodity prices are unchanged since October '22, while most commodity indices exhibit similar behavior, with the exception of energy prices, which have fallen significantly since mid-2022. Inflation is an issue only in the service sector, and those prices are dominated by wages and shelter costs, both of which tend to be lagging indicators of inflation pressures on the margin. Meanwhile, we know that housing prices continue to soften, and with only moderate increases in the money supply, it is likely that wage pressures will soften as well.