Deflation

The current target for the federal funds rate, which is the Fed’s key policy interest rate, is between 5.25 and 5.50 percent. Using core PCEPI growth, the inflation-adjusted range is 3.29-3.54 percent. As always, we must compare this to the natural rate of interest. Sometimes called r* by economists, this is the inflation-adjusted rate consistent with maximum employment and output, as well as non-accelerating inflation. We can’t observe this rate directly. But we can estimate it. Widely cited figures from the New York Fed place r* between 0.57 and 1.19 percent. That means current market rates are roughly three times as high as the estimated natural rate!

According to Nerdwallet, citing data released in November by the Department of Labor, the “consumer price index — a proxy for inflation — remained flat from September to October, at 3.2%.” Moreover, the consumer price index report “shows year-over-year price index drops in 92 goods and services categories (among 338 measured).”

In further evidence of this trend, “retailers such as Walmart say an era of price hikes is fading,” The Wall Street Journal reported. Meanwhile, “Adobe, which tracks online sales through its analytics arm, predicts holiday discounting will hit record highs.”

The American Farm Bureau said in its annual tally that the average price of a Thanksgiving dinner meal with turkey and sides is down 4.5% from 2022’s record high.

The intrigue: For general merchandise — all items excluding groceries — Walmart is rolling back pricing, “which will help our customers during this holiday season,” McMillon said.