Inflationary Insights: Breaking Down the January CPI
Over the last year and a half, we have seen some of the highest inflation rates since the second of the two recessions in the early 1980s. Over the past year we have slowly made our way back down but core CPI remains elevated, sitting at a level last seen in the early 1990s, while headline CPI is near levels seen in the early 2010s.
Here is a table showing the annualized change in Headline and Core CPI, not seasonally adjusted, for each of the past six months. Also included are the eight components of Headline CPI and a separate entry for Energy, which is a collection of sub-indexes in Housing and Transportation. We can make some inferences about how inflation is impacting our personal expenses depending on our relative exposure to the individual components. Some of us have higher transportation costs, others medical costs, etc.
A conspicuous feature in the year-over-year table is the volatility in energy, significantly a result of gasoline prices, which is also reflected in Transportation.
The chart below is a representation of the table above showing the year-over-year change in each of the components over the past four years.
Here is the same table as above with month-over-month numbers (not seasonally adjusted).
The Trends in the Consumer Price Index
The chart below shows Headline and Core CPI for urban consumers since 2007. Core CPI excludes the two most volatile components: food and energy. We've highlighted the 2% level that the Federal Reserve is targeting for inflation, although the Fed traditionally uses the Personal Consumption Expenditure (PCE) price index as their preferred inflation gauge. In August 2020, Fed Chairman Jerome Powell introduced a policy that not only allows for a level above 2% but welcomes it.
"In order to anchor longer-term inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time." See Statement on Longer-Run Goals and Monetary Policy Strategy update (revised January 2021).
Year-over-year Core CPI (purple line) was above 2% from the end of 2015 through February 2017 only to flip-flop again until the COVID-19 pandemic in April 2020, when Core CPI fell below 2%. The more volatile Headline CPI (green line) has spent part of the last five years under the 2% lower benchmark, and much of the volatility in this metric has been the result of broad swings in gasoline prices (more on gasoline here). Beginning in April 2021, both Core and Headline have been above the 2% benchmark.
Over the last year and a half, we have seen some of the highest inflation rates since the second of the two recessions in the early 1980s. Over the past year we have slowly made our way back down but core CPI remains elevated, sitting at a level last seen in the early 1990s, while headline CPI is near levels seen in the early 2010s. For a look at this longer term perspective, this next chart is similar to the one above but dates back to 1957.
For another perspective, here is a column-style breakdown of the inflation categories showing the change since 2000.
Note: For additional information on the component composition of the Consumer Price Index, see our Inside the Consumer Price Index.