US inflation is accelerating at almost twice the normal rate.
Analysis of GDP Deflator Trends
The elevated inflationary backdrop is now reflected directly in the GDP deflator: the increase in the GDP price index was 0.77% quarter-over-quarter versus 0.4% in Q4 2023, averaging 0.65% quarter-over-quarter in 2023 and 0.41% within the 2010 - 2019 long-run norm.
The main negative contribution came from the Consumer Spending Price Index (PCE), which the Fed uses to make decisions about the direction of the MPC. PCE rose 0.84% in Q1 2024 versus 0.44% in Q4 2023, averaging 0.68% in 2023, within the 0.37% norm.
Within PCE, the commodity group deflates by 0.13%, lower than the 0.35% deflation in Q4 2023, but better than the near-zero inflation (0.03%) averaged over 2023, with a norm of 0%.
Drivers of Inflation: Services and Investment
Inflation is driven by services, where demand growth is twice as high as normal and inflation is 2.4 times higher than normal. Service prices are rising at 1.32% (the highest annual rate) compared to 0.84% in Q4 2023, 1.01% in 2023, and 0.55% on average over 2010 - 2019.
Price Trends in Public Investment and Government Consumption
Investment prices have stabilized at 0.26% vs. 0.56% in Q4 2023, averaging 0.44% in 2023 and 0.23% in 2010 - 2019.
Public investment and government consumption prices have accelerated and deviated significantly from the long-term trend: 0.94% vs. 0.46% in Q4 2023, 0.46% on average in 2023, and 0.48% in the long-term norm in 2010 - 2019.
Price pressures are not evenly distributed but rather concentrated in significant sectors of the US economy. Services comprise almost 46% of GDP, with government consumption adding another 17.4%. This implies that for at least 63% of GDP, price indices are increasing at twice the usual rate.
Conclusion
The latest published data leaves the Fed with no room to maneuver on preventive MPC easing measures before inflation returns to target boundaries. When a sharp acceleration in quarterly inflation at the GDP price index level is recorded, this effectively extends the window to six months before the Fed acts, August - September at best
High rates, in turn, bring the moment of collapse for overleveraged and underleveraged companies and low profitability ever faster.