CPI Inflation in December

Beware the headlines — month-on-month inflation is (again) down, even if up year-on-year. Trimmed and chained CPI price inflation are also down, while sticky price inflation was flat. Headline and core CPI did surprise on the upside though (m/m, 10 bps over Bloomberg consensus).

First, recall 12 month inflation rates (aka y/y rates) are largely backward looking. Month-on-month measures are more reflective of current conditions, albeit more noisy.

Figure 1: CPI month-on-month inflation rate, annualized (blue), 12 month or year-on-year inflation rate (pink), in decimal form (i.e., 0.05 means 5%). NBER defined peak-to-trough recession dates shaded gray. Source: BLS, NBER, and author’s calculations.

For core inflation, there’s a slightly different picture, with y/y rising as m/m stays elevated.

Figure 2: CPI core month-on-month inflation rate, annualized (blue), 12 month or year-on-year inflation rate (pink), in decimal form (i.e., 0.05 means 5%). NBER defined peak-to-trough recession dates shaded gray. Source: BLS, NBER, and author’s calculations.

What do other measures of overall inflation look like on a m/m basis?

Figure 3: Month-on-month inflation of CPI (blue), chained CPI (brown), 16% trimmed CPI inflation (red), sticky price CPI inflation (green), personal consumption expenditure deflator inflation (black), all in decimal form (i.e., 0.05 means 5%).  Chained CPI seasonally adjusted using arithmetic deviations (brown). NBER defined recession dates (peak-to-trough) shaded gray. Source: BLS, BEA, Atlanta Fed, NBER, and author’s calculations.

Chained CPI m/m inflation is down, as is trimmed mean, while sticky price inflation held flat . A lower trimmed mean inflation means that the decline is broad-based, and not being driven by outliers. Flat sticky price inflation means that infrequently changed prices are  continuing to rise at the same pace as in November.

Moving to core measures (i.e., excluding food and energy prices), we see the following picture (note the vertical scale is made to have the same range as in Figure 3 to better illustrate how core measures have exhibited less variability).

Figure 4: Month-on-month CPI core inflation (blue), chained CPI core (brown), sticky price CPI core inflation (green), personal consumption expenditure core deflator inflation (black), all in decimal form (i.e., 0.05 means 5%).  Chained CPI seasonally adjusted using arithmetic deviations (brown). NBER defined recession dates (peak-to-trough) shaded gray. Source: BLS, BEA, Atlanta Fed, NBER, and author’s calculations.

Beware of “records”. On a month-on-month basis, inflation has been higher over the past 20 years.

Figure 5: CPI month-on-month inflation rate, annualized (blue), in decimal form (i.e., 0.05 means 5%). NBER defined peak-to-trough recession dates shaded gray. Source: BLS, NBER, and author’s calculations.

So, on a month-to-month basis, inflation is now nowhere near record highs.

Going forward, shelter costs are likely to have a measurable impact. CEA shows the contribution of owner occupied equivalent rent and rent of primary residence to headline CPI, y/y.

 

Despite the upside surprise, the 5 year inflation breakeven (unadjusted) fell 5 bps.