This post develops 49 timeline offset tables to determine how CPI inflation varies as the Fed Funds rate changes. It examines the first application of these timeline tables.
Image by jairojehuel from Pi
Introduction
This post continues last week’s discussion on how changes in the Fed Funds Rate are associated with CPI.1 We continue to examine the linear association of CPI (I) changes with various parameters (S).
I = mS + b
Here, S is a change in the Federal Funds rate. See this2 for a more complete discussion.
Data
Long-term monthly data for both CPI3 and Fed Funds rates are available.4 In this study, the monthly rates will be used. Each month’s data will be a three-month moving average to reduce noise. The data tables are in Part 1 – Corrected.1
Table 1. Timeline of Monthly Inflation Data 1952-2024
Table 1 shows the inflation timeline from 1951 to 2024. There were eight inflation surges (black letters), six deflation surges (red letters), and five periods without significant inflation changes. The determination of this timeline is found in Part 1.
Table 2. Timeline of Monthly Inflation Data 1951-2024
Analysis
The 49 timeline offset tables are in Table 3. They cover Fed Funds changes leading CPI by 1,2, …, 24 months and the same for CPI changes leading Fed Funds. The 49th table (the first table in the display) is for coincident timelines.
Table 3. Timeline Tables for Fed Funds Rate Changes vs CPI Changes (1947 – 2024)
Click on the image for the full table in a .xsls Excel spreadsheet.
Inflation surge B, from July 1955 to March 1957
Figure 1 shows the monthly Fed Funds Rate and CPI inflation changes for the inflation surge from 1955 to 1957, with three-month moving average smoothing.
Figure 1. Monthly Changes for FFR and CPI, 1955 – 1957
As the surge progressed, CPI changes initially increased irregularly, and FFR changes decreased. Then both changes increased in 1956.
Figure 2 shows a weak positive association between FFR and CPI, R = 47% and R2 = 22%. This association is near R = 50%, the level at which moderate correlation is considered to begin.
Figure 2. Scatter Diagram for Monthly Changes FFR – CPI Data Pairs 1955-57, Coincident Timelines
Figure 3 shows a primarily weak negative correlation for the timeline offsets with complete data. The positive correlation for coincident timelines is notable.
Figure 3. Correlations Between FFR and CPI for Various Timeline Shifts, 1955 – 1957
Conclusion
Next week, we will continue analyzing more inflation surge periods. Discussion is deferred to then.
Footnotes
1. Lounsbury, John, “Fed Funds Rate and Inflation. Part 1,” EconCurrents, September 22, 2024. https://econcurrents.com/2024/09/22/fed-funds-rate-and-inflation-part-1/.
2. Lounsbury, John, “Government Spending and Inflation. Reprise and Summary,” EconCurrents, August 20, 2023. https://econcurrents.com/2023/08/20/government-spending-and-inflation-reprise-and-summary/.
3. Federal Reserve Economic Data, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, Index 1982-1984=100, Monthly, Not Seasonally Adjusted. Data updated as of August 11, 2024. https://fred.stlouisfed.org/graph/?id=CPIAUCNS.
4. Federal Reserve Economic Data, Federal Funds Effective Rate, Percent, Monthly, Not Seasonally Adjusted. Data downloaded September 18, 2024. https://fred.stlouisfed.org/series/FEDFUNDS.
