Parsing Recent Inflation Data - Expand Your Insight

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Parsing Recent Inflation Data
June 23, 2006

by Jim Dolmas

Measured core consumer price inflation has picked up noticeably over the past few months. The following table compares inflation over the 12 months of 2005 with annualized year-to-date inflation in several core consumer price indexes.[1]

	2005	2006 YTD annualized	Difference
CPI ex. food & energy	2.2	3.1	0.9
Median CPI	2.5	3.7	1.2
PCE ex. food & energy	2.0	2.7	0.7
Trimmed mean PCE	2.2	2.9	0.7
Market-based PCE ex. food & energy	1.7	2.2	0.5

What’s going on here? Some analysts have suggested that the primary culprit behind the recent surge in core rates is a sharp increase in the price index for owner-occupied housing.[2] For the PCE, at least, this is not the case. While the price index for owner-occupied housing has contributed somewhat to the recent surge, the pattern of increase in the core PCE remains even if owner-occupied housing is excluded from the index.

The following four charts show 1-, 3-, 6- and 12-month inflation rates for the PCE ex. food and energy and for the PCE ex. food, energy and owner-occupied housing (OOH).

Note in particular that the 3- and 6-month rates—which Chairman Bernanke described on June 5 as “having reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth”—are lower when OOH is excluded from the index, but still above 2 percent. For the 12-month rate, excluding OOH makes only a negligible impact over the past few months.

If OOH is not the culprit, which component is? Unfortunately in this case, there seems to be no single perpetrator. Looking at the distribution of component price changes over the past several months, it appears that the distribution’s center of gravity, so to speak, has shifted rightward. The fraction of components (weighted by expenditure) increasing at annualized rates of 0–3 percent has been squeezed, and the fraction of components increasing at annualized rates of better than 3 percent has grown.

Chart 5 plots the evolution of the distribution of price increases over the past year:

Compared with December 2005, the fraction of components experiencing annualized price increases above 3 percent has grown from about 33 percent to 57 percent, and the fraction with increases running at better than 2 percent has risen from 47percent to 68 percent. Rather than identifying a single component to blame for the recent pickup in core inflation, Chart 5 suggests an explanation more akin to the resolution of Agatha Christie’s Murder on the Orient Express: They all did it.

Dolmas is a senior economist in the Research Department of the Federal Reserve Bank of Dallas.

NOTES
1. The 2006 data covers January–May for the two CPI measures and January–April for the three PCE measures.
2. In both the PCE and CPI, a homeowner’s cost of housing services is measured by a homeowner’s “equivalent rent”, which treats the cost of consuming housing services as the rent the homeowner would have to pay to enjoy the same housing services if he or she were a renter rather than an owner.

SUGGESTED CITATION:
Dolmas, Jim (2006), Parsing Recent Inflation Data, Federal Reserve Bank of Dallas Expand Your Insight, June 23, 2006, http://www.dallasfed.org/eyi/usecon/archived/0606inflation.html