Unraveling the Complex Tapestry of Inflation Dynamics: Post-Covid Changes

The report from the Federal Reserve Bank of Boston discusses the recent trends in consumer price inflation, focusing on the period from 2021 to June 2023. After experiencing elevated readings in 2021 and 2022, inflation has moderated this year. The total consumer price index (CPI) decreased from 6.4 percent in December 2022 to 3.1 percent in June 2023, with core inflation (excluding food and energy prices) declining from 5.7 percent to 4.9 percent over the same period.

However, the moderation in inflation is not uniform across all sectors. Persistently high shelter inflation, accounting for 43 percent of the core CPI consumption basket, has contributed to the stickiness in core inflation. Excluding shelter from the core index, inflation slowed from 4.5 percent to 2.8 percent. The trimmed-mean CPI and median CPI, which downweight extreme price movements, also declined but showed divergent trends.

The Fed’s analysis delves into the distribution of inflation across consumption categories, revealing atypical features. While there have been declines in extreme tails (90th and 10th percentiles), intermediate percentiles continue to exhibit elevated inflation. The distribution shows bimodality, with some sectors experiencing low inflation and others showing relatively high inflation. This is particularly evident in the core inflation distribution excluding shelter and used vehicles.

The findings suggest that sectoral adjustments play a crucial role in driving inflation dynamics, consistent with the easing of supply bottlenecks. However, there is uncertainty about the persistence of supply-side factors influencing inflation. The distributional analysis indicates that the dispersion in the distribution of price changes is still atypical, although it is moving closer to pre-pandemic patterns.

The report emphasizes the role of sector-specific price adjustments in recent inflation dynamics, a phenomenon less pronounced in the years preceding the pandemic. It notes that the persistence of inflation ranks has been relatively low, cautioning against selectively focusing on categories with surprisingly low or high inflation.

Further analysis of the inflation outlook suggests optimism, with a decline in some measures of underlying inflation. However, caution is advised, as the distribution remains somewhat bimodal, unlike periods of low inflation before the pandemic. The decline in inflation has been influenced by unusually large deflation in some categories, which may not be sustained.

In conclusion, the publication provides a detailed analysis of recent inflation trends, highlighting the complex and uneven nature of inflation dynamics across consumption categories. It underscores the importance of considering sector-specific adjustments and warns against overly optimistic interpretations of recent improvements in inflation metrics.