Inflation is a complex and often misunderstood economic phenomenon. While it was once believed to be driven solely by monetary factors, there is now a considerable debate about its root causes and how to accurately measure it.
In recent months, inflation has become a top concern for US voters, with the personal consumption and expenditures (PCE) index showing a significant increase. This surge in inflation has raised concerns about structurally higher prices and the potential for inflation expectations to become “unanchored.”
To better understand the current inflation outlook, it is important to assess how different parts of the economy are contributing and how that affects future risks. By analyzing the categories included in the Core PCE index, we can determine whether inflation is broadly distributed or confined to select categories with a significant influence.
Key Points:
- Inflation is a complex and debated economic phenomenon.
- Inflation has become a top concern for US voters.
- The PCE index has shown a significant increase in inflation.
- Understanding how different parts of the economy contribute to inflation is crucial.
Methodology
In order to classify each category, a regression analysis was conducted based on the YoY log-change in the price index for each category. Categories were classified as “Above Trend” if inflation was higher today than before the pandemic, “Below Trend” if inflation was lower, and “At Trend” if there was no significant difference.
Inflation Deep Dive
Based on the analysis, the majority of spending is currently running above trend, putting pressure on consumers’ wallets. Goods account for much of the recent acceleration in inflation, while services are the dominant category in the “At Trend” group. The “Below Trend” group, which experienced deflation during the pandemic, is now showing signs of recovery.
Goods or Services?
Approximately 60% of all goods and 40% of all services are currently running above trend inflation. This suggests that goods are contributing more to inflation than services. However, there are potential upside risks if services categories in the “At Trend” group begin to see higher inflation.
What’s Next?
The data indicates that inflation is positive and accelerating across almost all categories. The key near-term risk is the possibility of categories in the “At Trend” group flipping to “Above Trend.” Overall, this suggests that core PCE is likely to remain high in the coming months, with significant implications for monetary policy.
