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Posts tagged with: "CPILFESL"

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How food and fuel prices fluctuate

Detailed prices from the CPI

The consumer price index (CPI) follows the price of a basket of goods. The goods in the basket are determined by the purchases of an “average” U.S. household. Each item is tracked at multiple locations and for numerous varieties. The data are then aggregated to form the CPI.

The CPI has been a part of FRED for quite some time (since the early days if not the very beginning). FRED also offers some finer slices of consumer price data. The graph includes three examples: unleaded gasoline, peppers, and tomatoes. These are still aggregates, as the tracked prices come from many locations and, for tomatoes at least, across the various brands, varieties, and other ways of differentiating products.

What immediately gets our attention is how dynamic these lines are. The prices for these items change a lot and with little notice, which is why monetary policymakers in general prefer to look at price indices that exclude food and energy: Volatility can hide the bigger picture of inflation.

To reveal the extent of this volatility, we constructed the graph below, which compares the general CPI and the CPI without food and energy. For the latter, we even included the series without seasonal adjustment to demonstrate that seasonal adjustment does not remove the noise that policymakers are worried about.

How these graphs were created: For the first graph, start from the Average Price Data release table, check the items you want displayed, and click “Add to Graph.” For the second graph, start from the CPI graph and go to the “Edit Graph” panel. From there, open the “Add Line” tab and search for “CPI less food and energy”; add the monthly seasonally adjusted series. Repeat for the not seasonally adjusted series. Finally, adjust the units to “Percent Change from Year Ago” and click “Copy to All.”

Suggested by Christian Zimmermann.

View on FRED, series used in this post: APU0000712311, APU0000712406, APU000074714, CPIAUCSL, CPILFENS, CPILFESL

Price growth at the tails

When policymakers discuss the inflation rate, they’re referring to a measure of the “central tendency” of a distribution of price changes. There are many many many (many) prices in a developed economy. Here in the U.S., for example, we have maybe 20 types of sugar-coated flake-shaped cereal whose prices can change from one month to the next. So, to make the inflation rate meaningful, we must condense this distribution of prices to a measure of, as statisticians would call it, “central tendency.” However, reasonable people can differ on the proper measure because the distribution of price changes has long “tails.”

In short, the tail of a distribution is the part that’s farther away from the average. For example, we see evidence of the tail of the distribution of prices every morning when we pick up a coffee and a newspaper and drive into work: The prices of the first two items, like most other prices, change very slowly; but the price of gasoline fluctuates wildly from day to day. Certain categories—namely, food and energy—have larger swings than most other goods, so some prefer a price measure that looks at all goods except food and energy. This measure is called the “core” CPI. However, food and energy are not the only highly variable goods.

The top graph shows the ratio of mean CPI inflation to median CPI inflation.* The CPI measures inflation by choosing a basket of goods that are prominent among the average consumer’s purchases. Within this basket, the distribution of price changes is usually approximately symmetric, which we see because the ratio of the mean to median is usually about 1. (Actually, it’s slightly less, at about 0.9.) The interesting exception is during the Great Recession period, when commodity prices fell sharply, bringing a strong negative skewness for the first time since the mid-1980s. We can see this by looking at the bottom graph, which plots the ratio of mean core CPI to median CPI. Notice there is no negative spike in this measure of skewness. The Great Recession and its aftermath, however, show large changes in the “third moment.” In this period when the economy seemed to be in tremendous flux, the headline, average CPI moved little. However, the skewness—and the tails of the price distribution—changed quite a bit.

* This is not totally precise, because the change in headline CPI is not exactly the mean change in prices nor is median CPI exactly the median of the change distribution.

How to create these graphs: Top graph: Search for and select “median consumer price index” and “consumer price index for all urban consumers,” selecting “All items” and “Seasonally adjusted.” Chose “Percentage change” for the units in both. In the formula field, apply b/a. Bottom graph: Do the same, but instead of adding the “All items” consumer price index for all urban consumers, select “All Items Less Food and Energy.”

Suggested by David Wiczer.

View on FRED, series used in this post: CPIAUCSL, CPILFESL, MEDCPIM157SFRBCLE

Which measures of inflation are relevant for policy?

The Federal Reserve has set a 2% inflation target. Does it meet that target? It depends on which inflation rate you consider. FRED offers many different series for the U.S. that reveal different views of inflation because they pertain to different groups of goods and services. The graph above shows eight series that receive a lot of attention in the context of policy: Three are above and five are below that 2% target. How are they different? Some look only at consumption expenses or production costs. Some include overall economic activity. Some exclude energy and food, price categories thought to be volatile and thus capable of clouding the picture of underlying inflation. (For example, removing the currently low prices of oil and its derivatives clearly leads to higher inflation numbers.) Some focus on prices that move slowly, which are thought to be good indicators of trend inflation. And one index considers only the median in the distribution of price changes. You can consider even more series in FRED. The point is that there’s a wide spread across those inflation rates, and determining which is the most relevant isn’t easy.

How this graph was created: One of the many way to graph these series is to search for “price” and restrict the choices with tags such as “nation,” “usa,” and “sa” (seasonally adjusted). These eight are likely to be at the top of these search results. Select the series you want and click the “Add to graph” button. Some series are indexes and others are inflation rates, so modify the units to show “Percentage change from year ago” for the series in index form. Finally, to add the black horizontal line at 2%, open the “Add series” panel and select “Trend series” from the pulldown menu. Once it’s added, modify it by choosing 2 for the initial and final values and change the color to black. Oh… We also removed the axis label because it became unwieldy with eight depicted series.

Suggested by Christian Zimmermann

View on FRED, series used in this post: A191RI1Q225SBEA, CPIAUCSL, CPILFESL, CRESTKCPIXSLTRM159SFRBATL, MEDCPIM158SFRBCLE, PCEPI, PCEPILFE, STICKCPIM159SFRBATL


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