St. Louis Fed’s Bullard Presents “Disinflation: Progress and Prospects”

February 16, 2023

JACKSON, Tenn.– Federal Reserve Bank of St. Louis President James Bullard presented “Disinflation: Progress and Prospects” (PDF) on Thursday to the Greater Jackson Chamber.

Bullard noted in the presentation that U.S. GDP growth improved in the second half of 2022 and that labor market performance remains strong. Inflation remains too high but has declined, he added.

Front-loaded Fed policy has helped keep market-based measures of inflation expectations relatively low, he explained. He added that continued policy rate increases can help lock in a disinflationary trend this year, even with ongoing growth and strong labor markets.

“These factors may combine to make 2023 a disinflationary year,” Bullard said.*

GDP Growth Improves

After negative real GDP growth in the first half of 2022, GDP growth improved in the second half of the year, Bullard noted. Third-quarter 2022 real GDP growth was 3.2%, and fourth-quarter 2022 growth is currently estimated at 2.9%, he said. Year-on-year growth is slowing, according to incoming weekly data, and the output gap remains positive, he noted.

“Real GDP growth now appears to have been stronger in the second half of 2022 than previously thought after puzzling readings in the first half of 2022,” he said. “Perhaps the best interpretation is that real GDP growth is slowing to be in a neighborhood of the potential growth rate of about 2% on a year-on-year basis after stellar growth in 2021.”

Labor Market Performance Remains Strong

Bullard noted that the number of job openings per unemployed worker remains at a high level. He also pointed out that measures of labor demand significantly exceed measures of labor supply. In addition, he noted that unemployment insurance claims in 2022 and so far in 2023 have generally remained at levels below those experienced during pre-pandemic years. The Kansas City Fed’s labor market conditions index remains at a high level, he added.

The Disinflationary Process Has Started

Bullard said inflation remains too high, but it has declined recently. The Federal Open Market Committee (FOMC) has a 2% inflation target specified in terms of headline personal consumption expenditures (PCE) inflation. Headline inflation has declined, but it can be inordinately influenced by fluctuations in volatile prices, he said. Measures of inflation that strip out volatile price movements, such as core PCE inflation (which excludes food and energy prices) and the Dallas Fed’s trimmed mean inflation measure, have also declined but by less than the headline measure, he explained.

He also noted that inflation expectations are back to relatively low levels.

“In part due to front-loaded Fed policy during 2022, market-based measures of inflation expectations are now relatively low,” Bullard said. “According to standard macroeconomic theories, inflation expectations are a key determinant of actual inflation.”

2023: A Year of Disinflation?

Bullard said the U.S. economy is growing faster than previously thought, and labor market performance remains robust with unemployment below its longer-run natural level.

“A natural forecast is that the pace of quarterly real GDP growth will now moderate and unemployment will rise to return to its longer-run natural level,” he added.

“Continued policy rate increases can help lock in a disinflationary trend during 2023, even with ongoing growth and strong labor markets, by keeping inflation expectations low,” he said.

*Note: Disinflation refers to a decrease in the rate of inflation toward the Fed’s 2% inflation target.

James Bullard served as president and CEO of the Federal Reserve Bank of St. Louis from April 1, 2008, to July 13, 2023. In this capacity, he oversaw the activities of the Eighth Federal Reserve District and was a participant on the FOMC.

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