Core Inflation Remains Steady


Consumer prices, measured by the Bureau of Labor Statistics’ (BLS) Consumer Price Index – Urban Consumer (CPI), rose by 2.1 percent on an unadjusted basis over the 12 months of 2017, and has broadly accelerated from the 1.63 percent reading in June 2017. Energy prices contributed to the increase in the headline measure of consumer inflation, climbing 6.9 percent over the year. Shelter prices increased by 3.2 percent over the year, faster than overall inflation. Excluding energy and food prices, “core” inflation rose by 1.8 percent over the year. According to the BLS, the 12-month change has now been either 1.7 or 1.8 percent for eight consecutive months.

From a housing perspective, rental prices, a component of the Shelter Price Index, rose by 0.4 percent in December and by 3.7 percent over the past year, 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. The month of December marks the 77th consecutive month in which rental price growth over the past year has exceeded core inflation. Despite a slowdown in the growth of real rental prices recently, the rate of growth remains at historically elevated levels.

From a macroeconomic perspective, headline inflation exceeded two percent when measured over the past 12 months. A previous post illustrated how expectations of consumer inflation is a key determinant of current inflation. The figure above shows two measures of inflation expectations, inflation compensation from the rates on 10-Year Treasury securities and 10-Year inflation expectations measured by the Federal Reserve Bank of Cleveland. Since June 2017, both measures of inflation expectations have been accelerating. The measure of inflation compensation gleaned from financial markets has risen from 1.73 percent to 1.90 percent, while the measure of inflation expectations has increased from 1.73 percent to 2.01 percent.

While the two inflation expectations series tend to track each other closely, there was a period of time between 2009 and 2014 that the gap between the two series was unusually wide. The figure above suggests that the gap widened with incidence of the grey bars, which represent actions taken by the Federal Open Market Committee in response to the Great Recession. The first gray bar represents when the FOMC announced $100 billion in GSE direct obligations and $500 billion in mortgage-backed securities. The final grey bar represents the end of the third installment of quantitative easing (QE3). In the months leading up to the end of QE3, the spread between the two measures of inflation expectations narrowed, remaining small relative to 2009 to 2014 period, in the months since then.

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