Weekly Economic Trends and Indicators

The Headline:

Last Wednesday, the Bureau of Labor Statistics (BLS) reported that the consumer price index (CPI) rose 0.3% (seasonally adjusted) in April. The index increased by 3.4% over the last twelve months. This was better than expected, as the market was anticipating a 0.4% increase. Additionally, the Bureau of Economic Analysis (BEA) reported last month that the personal consumption expenditures (PCE) price index increased by 0.3% in March resulting in a 2.7% increase over the previous twelve months. Excluding the more volatile prices of food and energy, the twelve-month inflation rates were 3.6% for the CPI and 2.8% for the PCE price index.

The Details:

Although the PCE is the preferred inflation measure for policymakers at the Federal Reserve (see below for the context), one advantage of the CPI is the ability to easily drill down and see the price increases of various components of the market basket. Looking closely at the individual components of the CPI, we see that inflation of the prices of most goods has come under much better control. Certain types of apparel, foods and other commodities have seen much smaller price increases, and in some cases even price decreases in recent months. However, certain types of services continue to see significant price increases.

Among the services experiencing the highest 12-month inflation in the CPI are electricity (5.1%), shelter (5.5%), and motor vehicle insurance (22.6%).

The Context:

These two price indexes are both important for gauging the rate of inflation as they measure changes in price in slightly different ways. The CPI is based on a fixed basket of goods while the PCE price index is based on actual consumption goods bought and sold. Because the PCE price index takes into account the way that consumers substitute less expensive goods for more expensive goods when prices are rising, it tends to read lower than the CPI. As a result, the PCE price index is also a more accurate measure of inflation in terms of actual spending patterns.

This difference in measurement causes the PCE and CPI to put different weights on various types of spending as inflation rises and falls. We can see this most vividly with housing inflation currently as it is a large component of each index and has seen faster than average inflation.

While inflation is not falling as quickly as some would like, there are glimmers of hope in the most recent data. Sectors seeing the most inflation now are mostly reflecting lagged effects. Utilities need time to get rate increases approved. Insurance rates are based on the experience of higher prices for parts and repairs. Therefore, we would expect that inflation will moderate over time, even in these sectors. This may explain why the Federal Reserve is content to let this play out over time rather than overreacting to short-term blips in inflation such as we saw in February and March.

Next week: Financial market update