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Core PCE inflation was at consensus, 0.2% m/m. Are we in a new inflation regime?

Figure 1: Month-on-month inflation annualized, for CPI (bold blue), core CPI (tan), PCE deflator (bold sky blue), and core PCE deflator (light green). NBER defined peak-to-trough recession dates shaded gray. Source: BLS, BEA via FRED, NBER, and author’s calculations.

Headline CPI and PCE deflator month-on-month inflation looks like they’re down. So too for core CPI and PCE deflator. In order to make a more formal assessment, I estimate a simple Markov-switching model (two regimes, different variances) over the 1960-2022 period.

This yields the following regime probabilities (filtered, smoothed):

Figure 2: Estimated regime probabilities (sky blue). NBER defined peak-to-trough recession dates shaded gray. Source: Author’s calculations.

As of November 2022, the probability of being in the high inflation regime is 15%.

Since the decline in core inflation is less marked, the estimated probability for being in the high inflation regime is 80%.

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