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Where CPI inflation isn’t so high

Including a closer look at rents

There’s no doubt that consumer price inflation is relatively high. The consumer price index (CPI), though, is a composite of the prices of many goods and services. Thus, some show even higher inflation, such as energy and transportation, and others show lower inflation. This is what the FRED graph above is all about.

The blue bar shows overall CPI inflation. The other bars display specific categories with lower-than-average inflation. For example, both education and health services, which have had noteworthy price increases in the past, are showing much more restraint now. There are also puzzles, like alcoholic beverages, toys, and communications (for example, computers). Prices that are administratively set, such as water and trash collection, are fairly stable.

And then there’s a surprise: rents. The rent category in the CPI increases less than the overall CPI, but the news media have been referring to large rent increases for some time. Why the difference?

The reason is that the news media and the CPI consider different pools of rents. The news media mostly refer to rents that new renters face. The CPI has a rent pool that includes mostly continuing renters, whose rents are more stable or haven’t increased yet. In addition, the CPI’s rents survey samples participants every six months, precisely because rents are usually so stable. If rents have increased, there can be a delay in that increase showing up in the rents component of the CPI.

How this graph was created: Start from the CPI release table: Check the series to display, click “Add to Graph,” and shorten the sample period to the last two observations. From the “Edit Graph” panel, use the “Format” tab to choose the bar graph option.

Suggested by Christian Zimmermann.

Revisions and updates to CPI data

Recalculating seasonal adjustment factors and expenditure weights

The FRED Blog has used ALFRED graphs to discuss the regular revisions to employment data and the periodic updates to real gross domestic product data. Here, once again, we tap into ALFRED to discuss revisions and updates to consumer price index (CPI) data.

The bars in the ALFRED graph above show the annual CPI inflation rates between 2018 and 2021 using two different vintages of CPI data: before (in red) and after (in blue) the January 2022 revision and update to the CPI data. The differences in annual inflation rates are minimal, so what is involved in those revisions and updates?

The revisions are conducted every year and involve adjusting many of the 80,000 individual prices recorded every month for changes in their seasonal patterns. For example, fresh fruit prices are lower during harvest on account of the bountiful supply available. The BLS considers these price swings and reports seasonally adjusted price indexes. However, the seasonal changes in prices can be as fickle as the seasonal weather and the corresponding adjustment factors used by the BLS require regular evaluation.

The updates are conducted every two years and involve adjusting the relative weights of goods and services purchased across eight different categories of consumer spending. For example, over the past two years of COVID-19-induced disruptions to regular life, consumers shifted their food purchases away from restaurants towards groceries. The BLS considers those changed patterns by introducing new spending weights in its market basket for goods and services.

Some research shows the impact large-scale and less-frequent revisions and updates to CPI data have on the accurate calculation of consumer price inflation. In that light, the small differences in annual inflation rates across data vintages reflected in the ALFRED graph are a testament to the value of more frequent and smaller-scale updates to CPI data. More accurate data facilitates better decision making, even if the reported inflation rates do not change much.

How this graph was created: Search ALFRED for “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average.” By default, ALFRED shows a graph with two sets of bars: the most recent vintage and the prior vintage. Add additional vintages by using the “Add Line” tab and select the date of the desired vintage from the “or select a vintage” dropdown menu. Change the start date and the end date above the graph to customize the number of data points shown.

Suggested by Diego Mendez-Carbajo.

From PPI to CPI

The consumer price index (CPI) measures the cost of a fixed bundle of consumer goods relative to the cost of those same goods in a chosen reference year. Inflation is the percent change in the index from one year to the next and reflects how prices are changing for consumers.

The producer price index (PPI) is a similar construct that measures the price that producers get for their wares. It was formerly called the wholesale price index (WPI). Because many of these goods are intermediate goods and thus inputs to the production of final consumer goods, one might hypothesize that changes in the PPI could forecast future changes in the CPI.

The FRED graph above shows recent movements in these two series (January 2015 to present). Both series have grown at a fairly constant rate over the medium term. Moreover, after an initial dip at the start of the COVID recession, the PPI has risen sharply. Does this mean that future CPI inflation is imminent?

While it’s certainty possible that changes in the PPI are passed through to the CPI, economists have found that the former generally does not forecast the latter (see Clark, 1995). What does the sharp increase in the PPI mean for consumer prices? Only time will tell.

How this graph was created: From the FRED main page, search for and select the data series “Consumer Price Index for All urban Consumers: All Items in U.S. City Average”. From the “Edit Graph” panel (orange button), use the “Add Line” tab to search for and select the data series “Producer Price Index by Commodity: All Commodities.” Using the sliding blue bar at the bottom of the graph (or the date entry boxes in the top right hand corner), adjust the timespan to your desired date range.

Suggested by Michael Owyang.

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