In December 2022, a deflationary period started in the USA. Formally, both the PPI (Final Demand) and CPI fell. In absolute values, the PPI fell from 140.721 in November to 139.544 in December, or by 1.18. When annualized, the PPI fell in December by 14.12 (12 months times 1.177) or by 10%.  Figure 1 shows the evolution of the monthly (annualized) PPI between Dec. 2011 and Dec. 2022. 

Figure 1. Annualized monthly dPPI/PPI from 2011 to 2022. In December 2022, the rate of fall was 10%. 

In absolute values, the CPI fell from 298.349 in November to 298.112 in December, or by 0.237. When annualized, the CPI fell in December by 2.84 (12 months times 0.237) or by 1.0%.  Figure 2 shows the evolution of the monthly (annualized) CPI between Dec. 2011 and Dec. 2022. 

Figure 2. Annualized monthly dCPI/CPI from 2011 to 2022. In December 2022, the rate of fall was 1.0%. 

The inflation period observed in the USA after the helicopter money was poured into the US economy in 2020 is quite different from all natural (related to labor force growth/shrinkage) inflation observed ever before. Figure 3 demonstrates that the money was transferred to people without any economic reason and the Personal Income in 2020Q2 was 104% of the nominal GDP with a long-term ratio of 87%. This money activated processes of spending and consumer price inflation in the earlier 2021, i.e. approximately 1.25 years after the money was added. This was not a normal way inflation works but rather a one-timer. The prices jumped repeating the money-added curve and the effect of the ballooned PI in Figure 2 is the jump in prices. When the effect of the helicopter money faded away with the PI/GDP ratio sunk below the long-term trend at the end of 2021 no other price increase is possible. With a 1.25-year delay between the money injection and the CPI reaction, consumer prices have to fall. And this process started in December 2022. 

Figure 3. The ratio of the quarterly personal income, PI, and nominal GDP (both as estimated by the BEA) and the evolution of CPI in the USA.

The observed CPI and PPI inflation rates (around 6%) are still high and it may cause some doubts at the start of a deflationary period. The high CPI/PPI estimates are the effect of the price jump many months ago. Figure 4 depicts the monthly CPI increment, dCPI. The largest monthly increment, 3.85, was observed in June 2022. It will affect the rate of inflation till June 2023 when this reading will not be counted in anymore. And the next increment in July 2022 was below 0. Then inflation will become negative on an annual basis. Before July 2023, the annual rate of inflation will gradually drop to 0, but the monthly inflation rate estimates will be all negative.

The deflation period will last longer than the current high inflation period. The reason is simple – the consumer and producer prices in December 2022 were at a much higher level than in January 2020: CPI by 15% and PPI (FD) - 17%. There is no money in the PI to match the new level of consumer and produced demand as expressed in new dollars, as Figure 3 shows. To print more (a few trillions of dollars) money is not as easy no as in 2020 as the debt ceiling is a big political issue before the 2024 elections. The total price fall will be larger than the growth by 15% -17% because price deflation is a self-promoting process.

Figure 4. Monthly CPI increment, dCPI. 

The deflation period will last longer than the current high inflation period. The reason is simple – the consumer and producer prices in December 2022 were at a much higher level than in January 2020: CPI by 15% and PPI (FD) - by 17%. There is no money in the PI to match the new level of consumer and produced demand as expressed in new dollars, as Figure 3 shows. To print more (a few trillions of dollars) money is not as easy no as in 2020 as the debt ceiling is a big political issue before the 2024 elections. The total price fall will be larger than the growth by 15% -17% because price deflation is a self-promoting process.

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