Core Inflation Ticks Up

The Bureau of Labor Statistics reported that prices faced by urban consumers rose by 0.1 percent over the month of October, slowing down from the 0.5 percentage point increase in September and the 0.4 percentage point rise in August. Over the past year, headline CPI grew by 2.0 percent on a not seasonally adjusted basis, slower than then 2.2 percent growth in September.

The monthly increase reflected, in part, a decline in energy prices. Following two consecutive months of increases, the Energy Price Index fell by 1.0 percent over the month of October. After rising by 0.1 percent for two consecutive months, food prices were unchanged in October. Excluding energy and food prices, “core CPI” accelerated to 0.2 percent from 0.1 percent in October. Shelter prices, which account for the largest share of the CPI increased by 0.3 percent over the month.

On a 12-month basis, food prices rose accelerated to 1.3 percent while energy prices slowed to 6.4 percent. Twelve-month core inflation accelerated to 1.8 percent after remaining at 1.7 percent for five consecutive months led by the 3. Percent growth in shelter prices.

Rental prices, a component of the Shelter Price Index, rose by 0.3 percent in October, faster than both headline and core inflation. Over the past 12 months, real rental prices, rental prices adjusted for core-CPI rose by 1.9 percent. October marks the 75th consecutive month in which rental price growth over the past year has exceeded core inflation. However, after reaching a post-recession peak of 2.2 percent in August 2017, the October growth rate in real rental prices represents the second consecutive slowdown in real price growth.

On a macroeconomic level, previous analysis has noted that inflation is related to expectations of future inflation, labor market conditions, and additional price shocks such as energy price volatility. Previous analysis also suggested that expectations of low future inflation may be contributing to the low current rate of inflation that has generally prevailed since the end of 2012.

The figure above also demonstrates the relationship between the labor market and inflation as well as how this relationship varies over time. Inflation is partly a function of the labor market. More precisely, the gap between the unemployment rate and the natural (non-accelerating inflation) rate of unemployment.

The figure above illustrates that there are periods in which inflation accelerates as the unemployment rate gap declines and inflation decelerates or prices decline when the unemployment rate is rising (e.g. 2009). However, there are periods when the relationship doesn’t look to hold empirically. Part of this may be a timing issue. For example, inflation was decelerating in 1992 the gap in the unemployment rate was declining in 1992 band began to decline in 1997, and while inflation was positive during this period, which would be acceptable if inflation expectations aren’t adaptive, it wasn’t until 1998 that inflation began to accelerate.

The most recent release indicates that the slowdown in energy prices contributed to the deceleration in headline inflation. The data suggests that energy price shocks may play a more systematic role, then theoretical assumptions (price shocks are zero on average) imply. As shown in the figure above, headline inflation has responded visibly to changes in energy prices. These energy price shocks may be playing a role in the determination of overall inflation. This is a key reason why some policy makers prefer to monitory core-inflation instead.

However, core inflation is currently below 2.0 percent as well.  Recent research by economists at the Federal Reserve Bank of Boston, assessing changes in different components of the CPI relative to changes in the gap in the unemployment rate (a Phillips Curve theoretic framework discussed above) have suggested that a number of items in the CPI saw a “flattening of the curve” with respect to the unemployment rate gap. In other words, the price change response across a “wide range of categories” was not as strong as it had been prior to the recession. These researchers point to “housing and services such as food away from home”. However, analysts at the Federal Reserve Bank of New York, using the slowdown in core inflation, demonstrate that prices of prices of core goods have been the culprit behind the slowdown in core inflation.


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