The latest inflation numbers are out, up 0.64% from April to May (7.7% annualized), on top of 0.77% (9.2% annualized) from March to April. . To get around the base controversy, I like to plot the level of the CPI:
The graph suggests that "reflation" from the pandemic recession was over last year, we had been back to the usual growth, and now we're embarked on something new.
Inflation is not the same everywhere. For another purpose I broke inflation down to durable goods and services.
Until about 1985, the three categories moved together. After that we saw a sharp divergence. Inflation depends on what you buy. Services got much more expensive, while durable goods actually saw deflation. The forces are familiar. The rise in skill premium has meant that people got more expensive, and some of that reflects also the rise in cost of businesses such as health care and universities which may have more to do with government payment. Durable goods got cheaper, thank you China, but also they got a lot better and the CPI decline reflects quality adjustments rather than lower sticker prices. (Nondurables and housing behave a lot like the average, so I don't show them.)
Not all inflation is the same, and what you experience depends on what you buy and where you buy it.
Now to the point: Where is the current surge in inflation coming from? I rebased the CPIs to 2018, and here they are. No surprise, the current surge of inflation is concentrated in durables. Durables went up 3% April to May, a 36% annualized rate, on top of 3.52% March to April! The others are rising too, interestingly, but not as spectacularly. It's also interesting that the big decline in the pandemic was among nondurables. This is all common sense. Bar and restaurant prices went down in the pandemic, less so TVs and gym equipment, and "stuff" is now really getting hard to find and to produce.
As Tyler Goodspeed points out, this inflation has wiped out the real value of recent nominal wage gains.
(For analysis, the "inflation" tag has several recent posts on the topic.)
Does the second chart suggest that the Fed's transitory story is correct? The services component is the most stable over time and while up, is not up dramatically, and looks roughly in-line with prior trend. Supply disruptions and demand fluctuations could explain the dynamics in durables and nondurables.
ReplyDeleteI think the third chart casts doubt on the transitory narrative, but there appears to be more uncertainty after January 2020, so it may just be the market grappling with the same question we are now.
DeleteSince 1980, the BLS has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality, and other things which are all more quantifiable in durable goods. I don't know whether the old way was better or worse, but the divergence you see is a reporting change, not an actual change.
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DeleteTim,
DeleteWhat you are referring to is hedonic adjustments. Those didn't start until about 1997 courtesy of the Boskin Commission:
https://en.wikipedia.org/wiki/Boskin_Commission
Prior to 1983, actual house / home prices were included in the consumer price index. They (home prices) were subsequently replaced with owner's equivalent rent.
Here is some screwed up logic - courtesy of the Fed (and our idiot government officials).
All things being equal, an increase in the rate of interest by the central bank will push marginal buyers out of home purchases and into rentals thus increasing the demand for rental space and raising the OER component of the CPI.
So rather than increasing interest rates causing a reduction in inflation, they can cause a rise in inflation instead.
Thanks for sharing this info gents. I was just about to ask what caused the 1985 inflation rate divergence between goods and services.
Deletehttps://giphy.com/gifs/mood-lRRjGTRlFwmQYFmmpU
DeleteCPI for All Urban Consumers: Purchasing Power
ReplyDeleteFRED https://fred.stlouisfed.org/series/CUUR0000SA0R
If you have enough money you stress on other things;
if not ... everything causes stress.
Just thinking out loud, after looking at John's charts: How much of this inflation is just a change in relative prices, as opposed to an increase in the general price level?
ReplyDeleteWe mustn't confuse a change in relative prices with inflation. :-(
ReplyDeleteThe numbers are wrong as the majority of government numbers are. Go to the grocery store and look at the 85% rise in dry goods coupled with the hidden inflation of shrinking amounts of product in the package. Does anyone in academia or economics live on a budget themselves?
ReplyDeleteThe CPI numbers are for the mean consumer, a pretty well off individual. Everybody has his own personal inflation rate. One can try this calculator for oneself:
Deletehttps://www.wsj.com/articles/inflation-rate-calculator-customize-your-own-consumer-price-index-11621503004
So the question faced by all of us is what will inflation bring in the next 12 months. If the recent surge is in durable goods, this can be attributed to various disruptions in the supply chains and will fix itself shortly. Does the fed have it right?
ReplyDeletePer other comments 'relative price' of specific goods, mostly cars and chips relative to other goods gets the blame now. In the '65-'82 Great Inflation, going off gold, expensive Vietnam war ($1 trillion in current dollars) and later gold relative price, maybe mostly loss of confidence in the dollar globally? Not having lived through that one I am interested in the comparisons.
ReplyDeletehttps://fred.stlouisfed.org/graph/fredgraph.png?g=EFtT