The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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April 07, 2010

Disinflation: Is it all housing? We think not—and we're not alone

Yesterday, the Federal Open Market Committee minutes contained this observation:

While the ongoing decline in the implicit rental cost for owner-occupied housing was weighing on core inflation, a number of participants observed that the moderation in price changes was widespread across many categories of spending. This moderation was evident in the appreciable slowing of inflation measures such as trimmed means and medians, which exclude the most extreme price movements in each period.

A few weeks ago, Laurel Graefe posted a nearly identical sentiment in this blog using data from the January consumer price index (CPI).

To that evidence we would add a recent issue of the Federal Reserve Bank of San Francisco Economic Letter. That article conducts a similar exercise using the personal consumption expenditure price index (PCEPI). The authors note that the "decrease in housing inflation only accounts for a small part of the overall disinflationary pressure on core PCEPI."

The authors included this chart as visual evidence of the broad-based nature of the recent disinflation:


Their chart is reproduced here for two reasons. First, we are suckers for a cool chart, and this one certainly qualifies. But this chart has the added benefit of being very informative. The size of the circles represents the weight of the items in the consumers' market basket. Circles under the dashed 45 degree line represent goods or services in the market basket that have shown less price pressure in the past 18 months than during the prior three and a half years. Note that the cost of housing is one of the goods under the 45 degree line. But the authors' point is that most of the consumers' market basket is under this line—a pretty clear sign that the disinflation we have been seeing extends well beyond the cost of housing.

At the risk of piling on, we'd like to add yet another chart to the mix. In the ordinary course of business, at the Atlanta Fed we compute diffusion indexes for the CPI on both a weighted and unweighted basis. A diffusion index is designed to gauge the breadth of change in some aggregate statistic (though it is silent about the magnitude of that change).

The diffusion index below is the 12-month diffusion index for the CPI. Specifically, it shows the proportion of the CPI market basket that rose more (+) or less (–) during the past 12 months than during the prior 12 months. So diffusion index values below zero indicate that the majority of the CPI is rising less rapidly than a year ago while values above zero indicate the opposite. On both a weighted and unweighted basis, the CPI 12-month diffusion index is below zero—and has been since last April. Conclusion? It's not just the housing sector that is driving the recent disinflation trend.


On a concluding note, we'd like to call your attention to a new Web page, The Inflation Project, that is intended to be a repository of information about inflation—from news reports to recent research. We find these reports useful in our daily work and thought you might find them informative as well. (Follow The Inflation Project using RSS.)

By Mike Bryan, vice president and senior economist, and Laurel Graefe, senior economic research analyst in the Atlanta Fed's research department

April 7, 2010 in Federal Reserve and Monetary Policy , Inflation | Permalink


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Great stuff. Please create an RSS feed for the Inflation Project!

Posted by: Ned Baker | April 08, 2010 at 01:47 PM

And you have to wonder is some if not most of it demand. It sure as heck is CA where those authors live, they got 20%++ unemployment in many places and housing costs (still) at $200-$400 sqft.

If they are our Cassandra, as has often been the case, then we can all look forward to a lower standard of living.

Posted by: FormerSSResident | April 10, 2010 at 09:51 AM

Sounds like the Fed is worried that the general public senses real world inflation. The ISM surveys provide a prices component and they both show very high readings.

Posted by: Les | April 10, 2010 at 11:34 AM

We need inflation in order to sustain a durable growth.
It provides an incentive for people to spend cash rather than saving it, because if they save it, the cash will lose value rapidly. In this way consumers start spending again pushing up inventories and production thus growth.
We must avoid to fall in the trap of no growth and deflation as Japan has done in the last decade.
Inflation also helps to solve the problem of the outstanding debts of individuals , corporations and sovereign states caused by the financial crisis of the last year.
In particular for the US, the more inflation we have, the less the dollar will be worth.
Because the debts are based on a specific number of dollars and not a specific value, the less is dollar is worth, the easier it will be to pay off debts.
So inflation is an important tool in getting the world out of debts.
Unfortunately this will be particularly unfair for those who have been saving money.
Ultimately they will pay the price for those who borrowed money, racked up huge debts, and spent more than they could afford.

Posted by: Gastone Ciucci Neri | April 12, 2010 at 04:29 PM

Inflation = good?

Insane nonsense. What made America a power was strong savings which created capital formation. This capital was invested into self liquidating capital goods...ie innovations, plants, machinery, info systems, etc...that paid for themselves.

We have been reduced to borrowing from the rest of the world to fund not investment in capital goods and innovation...but maintaining a lifestyle (ie consumption level) we can not afford.

So the solution is to inflate away our debts? Sorry but do you really think our creditors are so dumb as to keep loaning us money as we inflate away the debts we already owe them.

Sorry but this strategy of stealth inflation will fail for the US just as it has for other foolish powers that lost their way....

Posted by: Brant Williams | April 13, 2010 at 05:11 PM

Claim of deflation or disinflation in used cars is clearly wrong. Industry surveys have shown used car prices rising sharply in the last year, 15.6 percent year-over-year from January 2009. Greenspan has admitted in the past that the BLS survey understates vehicle inflation.

Posted by: Les | April 14, 2010 at 08:52 AM

There is inflation in everything I buy: where in this chart is:
insurance costs
health care costs
That's what I spend my money on, not luggage and jewelry! The real world is way inflationary.

Posted by: Jennifer Leathers | April 19, 2010 at 02:25 PM

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