Prices -> Diverging headline and core
The US Consumer Price Index numbers for last month were hotter than expected but still showed slowing year-over-year inflation. Headline and core CPI came in at 9.1% and 5.9% year-over-year, respectively.
Year-over-year rates of inflation can be contextualized with the path of the index and price levels that underlie them. A dip in price levels and a later rebound creates a “base effect” boosting the year-over-year measure of change, even when the index resumes something close to its original trajectory. The beginning of the pandemic certainly saw a drop in prices, but the surge in 2021 and into 2022 far surpassed even where index levels would have been expected to end up had they hypothetically maintained a steady 2% rate of increase over the last two years.
I also like looking at the distributions of components within CPI because it’s fun to watch, but also because it gives an idea of the level of dispersion between inflation for things as varied as men’s sweaters and medical services. In the chart below, I take 180 non-overlapping components of CPI and show the distribution of their year-over-year changes over time. Dispersion clearly increased with the onset of the pandemic and then amidst reopening, and since last summer the distribution has shifted to the right. It’s striking how few components’ prices are declining on a year-over-year basis right now.
Looking at their contributions to the overall rate of year-over-year inflation provides a cleaner look at the relative trends of goods and services prices. Based on this perspective, core goods had appeared in large responsible for the updraft in inflation that everyone’s talking about, but now core services’ contribution has been steadily marching higher for the last 10 months.
As can be seen in the chart below, the current level of core goods inflation flies in the face of decades of flatlining prices in the category. Structural forces of productivity growth, competition from abroad, and other factors have surely kept a lid on core goods prices this century, but when those will return to being the predominant drivers of goods inflation remains an open question.
Another way to breakdown the year-over-year series of core CPI involves ascribing the overall change in its current level from the level 12 months ago to different periods in-between. Much of the current year-over-year increase has come from the last three quarters.
Hypothetically if inflation begins to moderate from here — though this is very unrealistic, especially because of current rates of services inflation — year-over-year CPIs would start to decline steadily from these elevated levels The chart below extrapolates year-over-year inflation with the following months each exhibiting the average monthly rate of inflation of the last five years. Note that the Fed prefers to base its policy on the PCE price index, which would likely be lower based on the smaller weight of housing in that index.
For reference, various rates of inflation for important components of CPI can be found in the table below.
| Dec-21 | Jan-22 | Feb-22 | Mar-22 | Apr-22 | May-22 | Jun-22 | |
|---|---|---|---|---|---|---|---|
| Headline CPI | |||||||
| m/m, % | 0.6 | 0.6 | 0.8 | 1.2 | 0.3 | 1 | 1.3 |
| 3m ann, % | 8.9 | 8 | 8.4 | 11.3 | 9.9 | 10.7 | 11 |
| y/y, % | 7.1 | 7.5 | 7.9 | 8.6 | 8.2 | 8.5 | 9 |
| Core CPI (~79) | |||||||
| m/m, % | 0.6 | 0.6 | 0.5 | 0.3 | 0.6 | 0.6 | 0.7 |
| 3m ann, % | 7 | 6.9 | 6.8 | 5.8 | 5.7 | 6.3 | 7.9 |
| y/y, % | 5.5 | 6 | 6.4 | 6.4 | 6.1 | 6 | 5.9 |
| Food (~14) | |||||||
| m/m, % | 0.5 | 0.8 | 1 | 1 | 0.8 | 1.1 | 1 |
| 3m ann, % | 8.2 | 8.4 | 9.7 | 11.8 | 11.8 | 12.4 | 12.3 |
| y/y, % | 6 | 6.7 | 7.6 | 8.5 | 9 | 9.7 | 10 |
| Energy (~7) | |||||||
| m/m, % | 0.9 | 0.9 | 3.5 | 11 | -2.7 | 3.9 | 7.5 |
| 3m ann, % | 32.1 | 18.3 | 23.1 | 80.5 | 56.1 | 58.7 | 39.7 |
| y/y, % | 29.4 | 27 | 25.7 | 32.2 | 30.2 | 34.4 | 41.5 |
| Core goods (~21) | |||||||
| m/m, % | 1.2 | 1 | 0.4 | -0.4 | 0.2 | 0.7 | 0.8 |
| 3m ann, % | 13.3 | 12.9 | 11 | 4.1 | 0.8 | 1.8 | 6.8 |
| y/y, % | 10.7 | 11.7 | 12.4 | 11.7 | 9.7 | 8.5 | 7.1 |
| Core services (~58) | |||||||
| m/m, % | 0.3 | 0.4 | 0.5 | 0.6 | 0.7 | 0.6 | 0.7 |
| 3m ann, % | 4.7 | 4.7 | 5.4 | 6.5 | 7.7 | 8 | 8.5 |
| y/y, % | 3.7 | 4.1 | 4.4 | 4.7 | 4.9 | 5.2 | 5.5 |
| Apparel (~3) | |||||||
| m/m, % | 1.1 | 1.1 | 0.7 | 0.6 | -0.8 | 0.7 | 0.8 |
| 3m ann, % | 10.3 | 12.3 | 12.2 | 9.8 | 2.1 | 1.9 | 2.8 |
| y/y, % | 5.7 | 5.3 | 6.6 | 6.8 | 5.4 | 5 | 5.2 |
| Used cars and trucks (~3) | |||||||
| m/m, % | 3.3 | 1.5 | -0.2 | -3.8 | -0.4 | 1.8 | 1.6 |
| 3m ann, % | 38.6 | 33.1 | 19.6 | -10.1 | -16.5 | -9.3 | 12.9 |
| y/y, % | 37.3 | 40.5 | 41.2 | 35.3 | 22.7 | 16.1 | 7.1 |
| Airline fares (~1) | |||||||
| m/m, % | 2.5 | 2.3 | 5.2 | 10.7 | 18.6 | 12.6 | -1.8 |
| 3m ann, % | 14 | 30.4 | 48 | 100.7 | 262.9 | 376.3 | 195.2 |
| y/y, % | 0.7 | 4.9 | 12.7 | 23.6 | 33.3 | 37.8 | 34.1 |
| Shelter (~33) | |||||||
| m/m, % | 0.4 | 0.3 | 0.5 | 0.5 | 0.5 | 0.6 | 0.6 |
| 3m ann, % | 5.6 | 4.9 | 5.1 | 5.4 | 6.3 | 6.7 | 7.1 |
| y/y, % | 4.2 | 4.4 | 4.8 | 5 | 5.1 | 5.4 | 5.6 |
| Medical care services (~7) | |||||||
| m/m, % | 0.3 | 0.6 | 0.1 | 0.6 | 0.5 | 0.4 | 0.7 |
| 3m ann, % | 4.4 | 5.3 | 4.5 | 5.6 | 5.3 | 6.5 | 7 |
| y/y, % | 2.5 | 2.7 | 2.4 | 2.9 | 3.5 | 4 | 4.8 |
| Education (~3) | |||||||
| m/m, % | 0.1 | 0.2 | 0.2 | 0.3 | 0.2 | 0.3 | 0.4 |
| 3m ann, % | 2 | 2.1 | 2.1 | 2.6 | 2.6 | 3.1 | 3.7 |
| y/y, % | 2 | 2.1 | 2.1 | 2.5 | 2.5 | 2.5 | 2.7 |
| Transportation services (~5) | |||||||
| m/m, % | 0 | 1 | 1.4 | 2 | 3.1 | 1.3 | 2.1 |
| 3m ann, % | 3.8 | 7.3 | 10.2 | 19.3 | 29.3 | 28.6 | 28.9 |
| y/y, % | 4.1 | 5.4 | 6.4 | 7.5 | 8.4 | 8 | 9 |
|
Number next to component name represents its weight in the overall index. Coloring represents the degree of change in the rate of inflation from the month before. Source: BLS, @benbakkum. |
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