Gas Prices Drive Overall Inflation


According to the Bureau of Labor Statistics, seasonally adjusted consumer prices faced by urban consumers (CPI) accelerated over the month of September 2017 reflecting an increase in the rate of gasoline price growth. However, the pace of acceleration slowed over the month reflecting in part a slowdown in the growth of shelter prices. Excluding the more volatile energy and food prices, “core-CPI” also slowed on a monthly basis. Over the past 12 months, the CPI increased by 2.2 percent on a not seasonally adjusted basis as gasoline prices increased by 19.3 percent and shelter prices rose by 3.2 percent. However, core-CPI remained at 1.7 percent for the fifth consecutive month.

NAHB tracks rental prices in the CPI, a component of the Shelter Index, and compares the rental price level with the overall price level that excludes energy and food prices, core-CPI. Over the month, rental prices rose by 0.2 percent. Since rental price growth exceeded overall inflation as measured with core-CPI, then “real” rental prices also rose in September. The figure above illustrates that real rental prices have been growing since 2013.

A previous post used an expectations-augmented Phillips Curve as a framework for understanding the recent acceleration of inflation. It took the form of:

t = ∏e – a(U-U*) + v;

In this form, inflation is the additive combination of inflation expectations (∏e), the labor market a(U-U*), and a price shock (v) such as one that is taking place in energy prices. However, the figure above indicates that the unemployment rate is currently at or below the Congressional Budget Office’s estimate of the natural rate of unemployment, indicating that the gap between the current rate of unemployment and the rate of unemployment that does not stoke additional inflation (e.g. non-accelerating inflation rate of unemployment) is virtually zero.

This reduces our formula to rational expectations:

t = ∏e + v;

meaning that inflation is equal to expectations of inflation plus the price shock. In a previous post, we assumed that inflation expectations were “adaptive”, that consumers’ expectations were essentially their experience in the most recent past. However, the figure above illustrates why that can be a strong assumption. The figure plots the current 12-month rate of price growth with inflation expectations over a 10-year period, consistent with the measure of inflation compensation derived from financial markets. As shown in the figure, inflation one month ago is not a perfectly accurate predictor of consumers’ expectations over a longer period of time.

Over the past two months, the 12-month change in the CPI has accelerated from 1.7 percent to 2.2 percent. The energy price shock has contributed to the acceleration in overall inflation, although its impact is still expected to be temporary. Over this same two-month period, inflation expectations have remained more stable, increasing from 1.8 percent to 1.9 percent. This is consistent with the stability displayed by the 12-month change of core-CPI and suggests that when the oil price shock subsides, overall inflation should moderate.


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