Core inflation is at a manageable 1.6% with overall inflation hovering at just 1.2%.
By Manuel Gutierrez, Consulting Economist to NKBA
The inflation rate remains low, as it has been for several months. Consumer prices measured by the overall Consumer Price Index (CPI) rose by just 0.2% in November, bringing the index 1.2% above what it was a year ago. As can be seen in Fig. 1, inflation has been rising at roughly the same pace over the last two months, and below 1.5% since April.
The Core CPI, which excludes food and energy items, has also been rising at a fairly constant rate for the last five months, although higher than the overall CPI (named “All Items” in the chart.)
Fig. 2 displays similar information, for the All Items as well as Core indexes, except that it covers a longer time period of five years. The five-year graph clarifies why economists prefer to use the Core CPI for reference and policy planning. By removing the more volatile items of Food and Energy, which tend to fluctuate more wildly, a truer picture of the underlying inflation rate emerges, as the chart illustrates. Effects of adverse weather or other temporary phenomena are removed when examining the core.
However, both indices obscure the fact that consumers face different inflation rates, depending on the specific items they purchase. In other words, the 1.2% overall inflation rate is a composite of many price changes across product lines.
Fig. 3 displays the annual price changes for a number of items within the CPI calculations. Leading the list is a 17.2% jump in the price of Major Appliances, which likely reflects the increase in consumer demand for appliances under the current “lockdown” conditions, where many consumers are either forced to stay close to home or prefer to do so because of uneasiness due to COVID-19.
Other items at the top of the list with the highest price increases are also product categories closely related to “stay at home” practices.
At the other extreme, categories with price declines are those with decreased demand and also tied to the pandemic. Leading the list is Gasoline, with prices that are nearly 20% lower this year than in November 2019. Overall Energy prices, which include household electricity as well as gasoline, are down 9.4% so far.
Other products with low demand in this group are Apparel, down 5.2% over the last 12 months, and Transportation Services, which are off by a more modest 3.4%.
