How Widespread Are Price Increases in the US

The St. Louis Fed has published an important analysis titled “How Widespread Are Price Increases in the U.S.?“.

What the note does: the author (Fernando M. Martin) tries to understand whether the currently high inflation is driven only by a limited set of items or whether it is more widespread. In order to do so, the author estimates the distribution of MoM percent changes (weighted by expenditure shares) and then computes the Trimmed mean inflation index (with different thresholds).

Results: The distribution of monthly inflation rates, weighted by expenditure shares is reported in Figure 1. The distribution is shown for the pre-Covid period (blue bars) and for the Covid period (orange bars). Two main takeaways: (i) there is a visible increase during Covid in both tails, although the increase in the right tail is much larger than the left tail, and (ii) the Covid-19 period distribution is less concentrated towards values in the range -1%-5% while it exhibits more observations in the range 5%-10%. Therefore, the author argues that while the currently high readings are certainly driven by extreme movements (the right tail), the recent increases are a bit more widespread than some (Fed included) assume. This conclusion is also visible by looking at Table 1, in which the author shows that you need to exclude items posting changes below -5% or above +5% in order to get an YoY of the Trimmed mean indicator similar to the pre-Covid period.

Comment: This analysis is very useful because it summarizes well the current inflation situation. Figure 2 can help understand the different approaches of those who claim that current inflation is “transitory” (#TeamTransitory) and those who claim we are witnessing a regime switch (#TeamInflationistas). #TeamTransitory  is making the case that (despite the above-the-average increases in several items), the current readings in the right tail will not only converge toward zero in 2022 but could easily show up in the left tail (the green boxes in Figure 2); the example here could be “used cars”, the drop of which could compensate for the increase in several other items in 2022. On the other hand, #TeamInflationistas is concentrating on the part of the distribution in the red rectangle in Figure 2, claiming that the distribution has shifted and might end up in a permanently higher inflation rate. Both camps have valid points: some items might entirely reverse the level gains observed this year; however, as we have been repeating for some time (see our emails about Median CPI), it is now undoubtedly true that the price increases are more broad-based than some (including the Fed) assume. As such, monitoring the entire distribution of price changes going forward will remain key.