Will Powell Take Yes for an Answer?

May PCE inflation beat expectations this morning, with year-over-year core falling sequentially for the third month in a row to the lowest level since last October. With downward revisions to the University of Michigan’s survey of consumer inflation expectations, Powell’s rationales for extreme hawkishness are evaporating. This new data confirms the validity of our monetarist model basing inflation on year-over-year M2 growth with a 13-month lag. That model now predicts core PCE will be at 1.95% in June 2023. It is not clear at all that Powell will respond to this good news. He seems stuck on a mythologized vision of Volcker as a manly inflation fighter, without seeming to understand that he was, in fact, a monetarist who followed models exactly like ours. We are positive we have seen peak inflation based on the evolving numbers, but we have no conviction that Powell will let that keep him from causing a wholly unnecessary recession.