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

2023-11-30T09:15:54-06:00

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. ‹ Declines for AD&C LendingTags: Boston Fed, cpi, housing costs, inflation, shelter

Unraveling the Complex Tapestry of Inflation Dynamics: Post-Covid Changes2023-11-30T09:15:54-06:00

Inflation Cools While Shelter Costs Remain High

2023-11-14T10:17:50-06:00

Consumer prices in October remained unchanged, with the increase in shelter index being offset by the decline in the gasoline index. This cooling inflation increases the probability that the Fed is done increasing rates. Despite the slowdown, shelter costs continue to be a key driver of inflation, accounting for over 70% of the total increase in all items excluding food and energy. The Fed’s ability to address rising housing costs is limited as shelter cost increases are driven by a lack of affordable supply and increasing development costs. Additional housing supply is the primary solution to tame housing inflation. The Fed’s tools for promoting housing supply are at best limited. In fact, further tightening of monetary policy will hurt housing supply by increasing the cost of AD&C financing. This can be seen on the graph below, as shelter costs continue to rise despite Fed policy tightening. Nonetheless, the NAHB forecast expects to see shelter costs decline further later in 2023, supported by real-time data from private data providers that indicate a cooling in rent growth. The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) was unchanged in October on a seasonally adjusted basis, following an increase of 0.4% in September. The price index for a broad set of energy sources fell by 2.5% in October as the decline in gasoline index (-5.0%) and fuel oil index (-0.8%) more than offset the increases in natural gas index (+1.2%) and electricity index (+0.3%).  Excluding the volatile food and energy components, the “core” CPI rose by 0.2% in October, after rising 0.3% in September. Meanwhile, both the food index and food at home index increased by 0.3% in October. In October, the indexes for shelter (+0.3%) was the largest contributors to the increase in the core CPI. Among the other indexes that rose in October include index for motor vehicle insurance (+1.9%), recreation (+3.2%), personal care (+6.0%) and household furnishings and operations (+1.7%). Meanwhile, the indexes for lodging away from home (-2.5%), used car and trucks (-0.8%) and communication (-0.3%) and airline fares (-0.9%) declined in October. The index for shelter, which makes up more than 40% of the “core” CPI, rose by 0.3% in October, following an increase of 0.6% in September. The indexes for owners’ equivalent rent (OER) increased by 0.4% and rent of primary residence (RPR) increased by 0.5% over the month. Monthly increases in OER have averaged 0.5% over the last ten months. These gains have been the largest contributors to headline inflation in recent months. During the past twelve months, on a not seasonally adjusted basis, the CPI rose by 3.2% in October, following a 3.7% increase in September. The “core” CPI increased by 4.0% over the past twelve months, following a 4.1% increase in September. This was the slowest annual gain since September 2021. The food index rose by 3.3% while the energy index fell by 4.5% over the past twelve months. NAHB constructs a “real” rent index to indicate whether inflation in rents is faster or slower than overall inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster (slower) than overall inflation, the real rent index rises (declines). The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile food and energy components). The Real Rent Index rose by 0.3% in October. Related ‹ Number of Bathrooms in New Single-family Homes in 2022Tags: BLS, cpi, housing costs, inflation

Inflation Cools While Shelter Costs Remain High2023-11-14T10:17:50-06:00

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