The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
- BLS Handbook of Methods
- Bureau of Economic Analysis
- Bureau of Labor Statistics
- Congressional Budget Office
- Economic Data - FRED® II, St. Louis Fed
- Office of Management and Budget
- Statistics: Releases and Historical Data, Board of Governors
- U.S. Census Bureau Economic Programs
- White House Economic Statistics Briefing Room
February 23, 2010
Looking behind the core inflation numbers
Last Friday's consumer price index (CPI) report showed headline inflation in January remaining stable from the previous month at a 2 percent annual rate, a bit above most private forecasts, boosted by higher fuel costs. But the show was stolen by the core measure. Excluding food and energy, consumer inflation saw the largest monthly drop in more than 27 years and its third largest decline in 47 years.
Several factors were behind the decline in the core index (such as falling airline fares, a dip in new car prices, and ongoing declines in prices for household furnishings and operations), but a sizeable drop in shelter prices, which account for more than 40 percent of the core CPI index, was a significant factor in January's dip. A concern that decelerating shelter prices could skew the core inflation measure was noted in the minutes of January's FOMC meeting:
“Though headline inflation had been variable, largely reflecting swings in energy prices, core measures of inflation were subdued and were expected to remain so. One participant noted that core inflation had been held down in recent quarters by unusually slow increases in the price index for shelter, and that the recent behavior of core inflation might be a misleading signal of the underlying inflation trend.”
Chart 1 illustrates the recent decline the in shelter component of the CPI and how, excluding shelter, core inflation has been growing at a more robust pace than is indicated in the overall number.
However, once we've opened the door for pruning sectors that have displayed unusual price behavior in recent months, we can find a slew of outlying components to pare. Take, for example, vehicle prices. With the impact of the ailing state of U.S. automakers, the federal government's “Cash for Clunkers” program, and the major recalls from Toyota, auto prices have been particularly volatile lately. Used car and truck prices have grown at annual rates between 20 percent and 44 percent in each of the past six months, skewing, some could argue, the core measure upward.
Chart 2 shows core CPI after subtracting both shelter and used vehicle prices, a picture that shows a lower inflation rate—more in line with the numbers in the overall core CPI.
My point here is not to advocate lopping shelter and vehicles, along with the already excluded food and energy prices from inflation—which, by the way, would leave us with less than 45 percent of the overall CPI index. In fact, my argument is the opposite. There are always some components of the index that seem anomalous—on either side of the distribution. Discriminately cropping entire sectors from the CPI may not be the best method for teasing out true underlying price pressures.
The Cleveland Fed uses a more methodical approach to exclude the CPI components that show the most extreme price changes each month. Their calculations show a more subdued underlying inflation environment, with median and trimmed mean CPI hovering around 1 percent for the past several months (chart 3). I'm not endorsing this method as a perfect estimation of “true” underlying inflation, but it does provide an example of indiscriminately trimming the outliers to see what's beneath.
By Laurel Graefe, senior economic research analyst at the Atlanta Fed
TrackBack URL for this entry:
Listed below are links to blogs that reference Looking behind the core inflation numbers :
- GDPNow's Forecast: Why Did It Spike Recently?
- How Low Is the Unemployment Rate, Really?
- What Businesses Said about Tax Reform
- Financial Regulation: Fit for New Technologies?
- Is Macroprudential Supervision Ready for the Future?
- Labor Supply Constraints and Health Problems in Rural America
- Building a Better Model: Introducing Changes to GDPNow
- How Ill a Wind? Hurricanes' Impacts on Employment and Earnings
- When Health Insurance and Its Financial Cushion Disappear
- What Is the "Right" Policy Rate?
- February 2018
- January 2018
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- May 2017
- April 2017
- March 2017
- Business Cycles
- Business Inflation Expectations
- Capital and Investment
- Capital Markets
- Data Releases
- Economic conditions
- Economic Growth and Development
- Exchange Rates and the Dollar
- Fed Funds Futures
- Federal Debt and Deficits
- Federal Reserve and Monetary Policy
- Financial System
- Fiscal Policy
- Health Care
- Inflation Expectations
- Interest Rates
- Labor Markets
- Latin America/South America
- Monetary Policy
- Money Markets
- Real Estate
- Saving, Capital, and Investment
- Small Business
- Social Security
- This, That, and the Other
- Trade Deficit
- Wage Growth