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Inflation Takes a Breather…

Upward pressure on the Consumer Price Index (CPI) from a few component prices reversed in October, and the 12-month growth rate in the index slowed from 3.9 percent to 3.5 percent, edging down for the first time since last November. This reversal came as a dip in energy prices (led by a 31.6 percent decrease in motor fuel) more than offset a modest 1.4 percent increase in food prices. However, October's increase in food prices—which was the smallest of the year—was due in large part to a fairly sizeable 28 percent decrease in fresh fruit and vegetable prices. Most of the other food categories were in the upper tail of the price-change distribution (posting increases above 5 percent).

Measures of underlying inflation, on the other hand, rose slightly. One popular measure of underlying inflation, the “core” CPI (which is the CPI excluding food and energy prices) rose 1.6 percent in October. The core CPI is up 1.8 percent over the past three months, slightly below its 6-month growth rate of 2.4 percent and its 12-month growth rate of 2.1 percent. Measures of underlying inflation produced by the Federal Reserve Bank of Cleveland—the median CPI and the 16 percent trimmed-mean CPI—rose 2.3 percent and 1.4 percent, respectively, in October. As was the case last month, both measures slowed relative to their respective 3- and 6-month growth rates.

October Price Statistics

Percent change, last
1 mo.a 3 mo.a 6 mo.a 12 mo. 5 yr.a 2010 average
Consumer Price Index
All items −1.0 2.4 2.1 3.5 2.3 1.4
Excluding food and energy (core CPI) 1.6 1.8 2.4 2.1 1.8 0.6
Medianb 2.3 2.8 2.5 2.2 2.0 0.7
16% trimmed meanb 1.4 2.6 2.5 2.5 2.1 0.8
Sticky pricec 2.5 2.5 2.0 1.9 2.0 0.9
Flexible pricec −8.8 2.4 2.1 7.8 3.3 3.5

a. Annualized.
b. Calculated by the Federal Reserve Bank of Cleveland.
c. Author's calculations.

A large contingent of automobile-related prices (used cars and trucks, new vehicles, car and truck rentals, and parts and equipment) decreased in October, which put some downward pressure on the core CPI. Notably, new car prices, which are still up 3.4 percent over the past year, followed up a 2.4 percent decrease in September by falling 5.1 percent in October. On the other hand, prices for medical care services jumped up 6.6 percent in October, their largest monthly increase in 13 months. Still, the 12-month percent change in the price index for medical care services stands at 3.1 percent and has yet to climb back to its longer-run (10-year) growth rate of 4.25 percent.

Figure 2. Component Price-Change Distribution

An alternative way to view the price-change distribution takes the focus off of the price changes for the individual components and draws it to where the mass of the distribution was centered during the month. Shifting the focus this way allows us to see that there was a leftward (downward) shift in the mass over the past few months. Notably, just one-third of the prices in the consumer market basket (by expenditure weight) rose at rates in excess of 3 percent in September and October, compared to an average of 43 percent over the first eight months of 2011. We can also see that, while it appears that some of the underlying mass has shifted from the upper end, the price-change distribution doesn't look nearly as disinflationary as it did during 2010 (when the average increase in the median CPI was a mere 0.7 percent).

Figure 3. CPI Component Price-Change Distribution

While we've seen a slowing in underlying inflation over the past few months, continued increases in OER and rent (perhaps as homeownership rates and rental vacancy rates continue to decline) are likely to put upward pressure on measured inflation. The indexes for owners' equivalent rent of residences (OER) and rent of primary residence—which account for roughly 30 percent of the overall index—accelerated in October. Rent of primary residence jumped up 4.8 percent during the month, pulling its near-term (3-month) growth rate up to 4.1 percent, well above its longer-term (10-year) growth rate of 2.8 percent. Following suit, OER rose 2.5 percent in October and has posted increases of at least 2.5 percent in three of the last four months. For comparison, prior to July 2011, the last time OER had a monthly increase of 2.5 percent or higher was March 2009. On a year-over-year basis, OER is now up 1.6 percent. Last October, the 12-month growth rate in OER was flat.

Figure 4. Rents

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