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Brent Meyer |

Economist

Brent Meyer

Brent Meyer is a former economist of the Federal Reserve Bank of Cleveland.

08.20.2012

Economic Trends

Visualizing Disinflation…And No, We’re Not There Yet

Brent Meyer

The Consumer Price Index (CPI) was virtually flat for the second consecutive month, rising at an annualized rate of just 0.6 percent in July, and is only up 1.1 percent over the past six months. While much of this softness has to do with declining energy prices, the core CPI (which excludes food and energy items) rose just 1.1 percent in July compared to its 12-month growth rate of 2.1 percent.

July Price Statistics

    Percent change, last
    1 mo.a 3 mo.a 6 mo.a 12 mo. 5 yr.a 2011 average
Consumer Price Index
  All items
0.6
−0.8
1.1
1.4
1.9
3.0
  Excluding food and energy (core CPI)
1.1
2.0
2.2
2.1
1.8
2.2
  Medianb
2.5
1.8
1.9
2.3
1.9
2.3
  16% trimmed meanb
1.3
1.4
1.7
2.0
2.0
2.6
  Sticky CPI
1.8
2.1
2.1
2.3
2.0
2.1
  Sticky CPI excluding shelterc
1.3
2.3
2.2
2.4
2.2
2.3

a. Annualized.
b. Calculated by the Federal Reserve Bank of Cleveland.
c. Calculated by the Federal Reserve Bank of Cleveland and the Federal Reserve Bank of Atlanta.
Source: Bureau of Labor Statistics.

Measures of underlying inflation produced by the Federal Reserve Bank of Cleveland—the median CPI and 16 percent trimmed-mean CPI—disagreed on how soft July's data were. The median CPI rose 2.5 percent during the month, while the 16 percent trimmed-mean CPI increased just 1.3 percent. Rents were the primary cause of the disparity in July. In contrast to the softness elsewhere in the market basket, rents continued to increase. Rent of primary residence jumped up 3.8 percent in July and is up 2.8 percent over the past year. Owners' equivalent rent (OER) rose 2.1 percent during the month, compared to its growth rate over the previous three months of 1.5 percent.

Given the current environment of sluggish GDP growth and an elevated unemployment rate, unwanted disinflation—a slowing in the rate of inflation—may raise some concerns. To be clear, July’s data are only one month’s worth, and even after factoring them in, the recent (six-month) trend in many underlying inflation measures is still within a few percentage points of 2.0 percent.

We can use the component price-change distribution to gauge the breadth (or lack thereof) of the recent softness in retail prices. The following “bubble-plots” plot the 45 components of the retail market basket used in calculating the median CPI. The size of the bubble corresponds to the relative importance (or weight) that each component carries in the market basket.  In all the pictures, the longer-run (10-year) annualized growth rate in each component is plotted along the horizontal axis. And the component price change for the time period in question is plotted on the vertical axis. If the bubble lies below the 45 degree line, its growth rate is slower than its longer-run trend. If it’s above, the growth rate is higher than trend.

The first bubble-plot is a clear example of disinflation. The 2009-2010 period was the closest the United States has come to deflation since the Great Depression. During this period, the median CPI averaged an increase of 0.9 percent and actually decreased in four of those 24 months. The bubble-plot reflects the fact that most components exhibited a sharp slowdown from their respective longer-run (10-year) trends (I omitted 2008 because the energy price shock would have exacerbated the slowdown). From 2009-10, 29 out of 45 components, or roughly 75 percent of the market basket by expenditure weight, increased at a rate at least 1.0 percentage point slower than their respective longer-run trends.

In contrast, over the past six months just 17 out of 45 components (comprising less than a quarter of the overall index by expenditure weight) are trending more than 1.0 percentage point slower than their respective longer-run trend.

For those that view food and energy price movements as entirely transitory, the lack of a disinflationary shift becomes more distinct. After excluding food and energy items, just 9 of the remaining 33 components (11 percent by expenditure weight) are trending more than a percentage point slower than their longer-run trend.

While the recent retail price data are coming in a little softer, it’s just that...a little softer. The underlying price distribution doesn’t reveal anything close to the broad-based deceleration in prices that we witnessed during 2009-2010.