Below, EPI director of research Josh Bivens offers his predictions for tomorrow’s release of the consumer price index (CPI) for August. Read the full Twitter thread here. 

The price decline will be driven overwhelmingly by commodity price softening. But even core inflation (excluding food and energy) fell in the PCE index last month to its lowest level since 2020. 2/

— Josh Bivens (@joshbivens_DC) September 12, 2022

What should policymakers if they get another month of breathing room on inflation? Many people will be persuaded by a view that the responsible thing to do here is maintain the fight to cram price pressure down as far as possible. 4/

— Josh Bivens (@joshbivens_DC) September 12, 2022

But, the “maintain pressure” view is only responsible if one thinks measurably-greater economic slack (higher unemployment, for example) is needed to pull inflation back down to more-normal levels (say around 2-3%) in a reasonable time-span. 6/

— Josh Bivens (@joshbivens_DC) September 12, 2022

Goods prices are set to post outright falls going forward. Supply chain pressure seems to unwinding – even in the face of China’s continued Zero Covid approach. The normalization of pre-pandemic spending patterns (more services and less goods) is continuing. 8/

— Josh Bivens (@joshbivens_DC) September 12, 2022

In the labor market, over the past 6 months, average hourly earnings are growing at a 4.8% annualized pace, down a full percentage point from January – a pronounced fall even with low unemployment. 10/

— Josh Bivens (@joshbivens_DC) September 12, 2022

About those profits – while the most recent quarter saw a huge increase in the contribution of profits to price growth, this was almost surely mostly in the energy sector. 12/

— Josh Bivens (@joshbivens_DC) September 12, 2022

What all this tells us is that something close to the current state of economic slack is consistent with moderating price pressures – even outside of food and energy. 14/

— Josh Bivens (@joshbivens_DC) September 12, 2022

For example, real final sales to domestic purchasers (domestic demand) grew by just 1.2% between 2021q2 and 2022q2. That’s a growth rate that should have substantially “cooled” the economy by any measure. 16/https://t.co/IBH0CQv4qe

— Josh Bivens (@joshbivens_DC) September 12, 2022

A month of flat prices would mean that the inflationary outlook has meaningfully changed. So, policy should change too. Hiking by 0.75 in the face of flat monthly prices tilts risks too-sharply in the direction of recession, and isn’t needed to keep tamping down inflation. end/

— Josh Bivens (@joshbivens_DC) September 12, 2022