Is Inflation Still Accelerating?

Over the past couple of weeks, I have gotten a number of questions on inflation. It seems to be one of the top-of-mind issues. Given that, and the fact that the most recent inflation data hit this morning, it seems appropriate to give an update.

What Are the Monthly Numbers?

There are two data series here: the headline number (which includes everything) and the core number (which excludes food and energy). The reason for the difference is that the core number captures only prices, which are not affected by interest rates and monetary policy. Oil and gas, for example, go up and down on their own supply-and-demand dynamics. How much food you eat doesn’t depend on the Fed. So, from a monetary policy perspective, the core number is useful. But from a real-world perspective? The headline number, which captures the actual experience of a consumer, is a much more useful number, as it includes actual costs. So, both are useful, but for different reasons.

Let’s start with the headline number. It was up by 0.5 percent, which was both in line with expectations and down significantly from the prior month’s 0.9 percent. On an annual basis, headline inflation was 5.4 percent, slightly above expectations but the same as last month. For the core number, the monthly figure was 0.3 percent, below expectations and below the 0.9 percent of last month; the annual number was 4.3 percent, down from 4.5 percent last month.

So, What Did We Learn?

The simplest and perhaps most useful fact is that inflation has, at a minimum, paused. For both the headline and core figures, the monthly and annual numbers were stable or down from last month. Based on that data, inflation is certainly not on an unstoppable increase.

The next fact that’s worth a look is the gap between headline and core inflation. Headline inflation is up by significantly more than core inflation, suggesting much of the rise comes from energy and food. Looking at the data, that conclusion makes sense—and it gives us some guidance as to where inflation is coming from and where it might be going.

What’s Pulling the Numbers Higher?

Looking at the data, the biggest component of that headline excess over core inflation is from energy prices. It isn’t about food, as food inflation has actually come down this year. But when you look at the energy CPI, it is up about 25 percent, year-on-year, and that lines up with increases in oil prices. The headline inflation story is about the oil market, not about general price inflation, and oil prices drop as well as rise. The headline numbers are not indicating sustained inflation.

But the core numbers still might be, as they are indeed up, even if they show signs of peaking. But here as well there are a couple of components that are pulling the core numbers higher. Vehicles are a big one, with the price of new cars up by more than 5 percent and the price of used cars up by more than 40 percent. Here, too, you can make a good argument that inflation is about a couple of factors, rather than being more broadly based.

Even when we look more closely at other components, the outlook is better than the headlines would suggest. Service inflation, for example, is up—but let’s deconstruct that. Shelter inflation, for example, is still at less than 3 percent. Medical care service inflation is down to just over 1 percent. The excess inflation comes, once again, from transportation services, which are up by more than 10 percent but have recently ticked down.

So, the inflation story is more about isolated components, rather than general increases in prices, and even those components are showing signs of peaking. And this is even before we consider the one- and two-year differential, where we see most of the price increases this year are just catching up on the lack of price increases in 2020. As we dig into the numbers, inflation is above where it has been but is showing signs of rolling over and returning to more comfortable levels.

Could Inflation Rise?

Of course. Will it rise? Yes, but likely only a bit more quickly over time than it has over the past several years, once the economy normalizes again. Do we need to pay attention? Also yes, which is what we are doing right now. But do we need to make significant changes to what we are doing? No. Not yet.