Inflation Ticks Back Up

New CPI data released today from the BLS indicates that U.S. inflation is not yet tamed. The graph below shows the one-year growth rate of the CPI on a monthly basis since the beginning of 2022.  


After consistent declines since June 2022, inflation has now increased slightly for two months in a row, and is now back up to 3.7 percent. This should worry anybody who hoped that inflation would continue falling down into the 2% range.

As for particular categories, gasoline prices rose drastically in August, up 10.6% in just one month. Rental housing expenses are also up 7.3% since a year ago. This is particularly difficult for consumers, since about 35% of monthly spending is on housing for an average consumer.

One word of caution: gas prices and housing costs do not cause inflation, they merely reflect inflation. Many other prices in the economy have fallen over the past year (for example, television prices are down 10.1% and washing machines are down 12.8%). Over time, when the overall price level rises (as opposed to changes in the relative prices of goods) it is due to changes in the overall quantity of money in an economy. The quantity of money is hard to measure, but the Federal Reserve does control a large chunk of it, and so monetary policy can definitely affect inflation rates.  This means that Jerome Powell's job is not yet done.

Inflation Rate Down Again

Data released by the BLS this week shows that the rate of CPI inflation in the U.S. was just 3.2% in October.  The graph below shows annual inflation rates since 1990.

Inf 1123

This is monthly data, but it shows the percentage growth in the CPI over the course of one year. This is how we generally measure inflation, but drastic shifts in this inflation measure are rare because it includes data for the entire preceding year.  In fact, looking at the raw CPI data for October 2023 indicates no change at all for the CPI (zero inflation) for the month of October.

I like to point out that the battle to reduce inflation has been admirably fought by Jerome Powell and the Federal Reserve.  They have weathered many complaints about potentially rising unemployment over the past year and a half as they tightened monetary policy through interest rate rises.  And yet the unemployment rate in the U.S. is still just 3.9 percent.  

The Fed's increases in interest rates have reduced the quantity of money circulating in the economy.  The graph below shows the M2 money supply since 1990. 

M2 1123

Economists do not all agree on the direct link between M2 and inflation, but they are clearly not unrelated.  That is, many factors might influence inflation in the economy, but the M2 money supply is a clear contributor.

Inflation Stays Lowish

Today's CPI report indicates that lower inflation is probably here for a while. Year-over-year growth in the CPI was just 3.2% in July (see the graph below). This follows on the heals of 3.1% inflation last month.  You can see from the graph that inflation is now back down into its normal range.

Inf 0723

The lower inflation reflects the Federal Reserve's commitment to bring inflation down to the 2% target range.  Just one year ago, inflation was 8.4 percent.

Keeping in mind that inflation is the growth rate of the general (overall) price level, it is still interesting to look at changes in some individual prices.  The table below shows a selected few "big movers," or prices that moved a lot in the past year. The last column also gives the weight assigned to these categories in the overall CPI.  Recall that this weight is equivalent to the portion of a typical consumer's monthly budget spent on these categories.

CPI Table 0723

As you can see, gasoline prices fell by almost 20% over the past year and the typical consumer spends about 3.4% of their monthly budget on gasoline. Frozen vegetable prices rose dramatically over the past year, climbing 17.1 percent. 


Inflation Climbs Again

New CPI data released this week shows that, despite the claims and wishes of our government leaders, inflation is not going away anytime soon.  Inflation for the year ending in January is estimated at 7.5%, according to the BLS. As the graph below shows, this is the highest U.S. inflation rate in forty years.  


This is not good news.  Perhaps the most discouraging aspect is the reaction of many of our political leaders, who are blaming this inflation on supply chain issues and market power combined with corporate greed. On the one hand, yes, both of these are currently present and both can lead to higher prices. But while those issues might help explain a one time jump in the price level, there is no theory as to how they cause continued price level growth.  Overall supply chain issues are certainly not continually worsening over the past 18 months.  Similarly, corporate greed is not a new phenomenon that suddenly appeared two years ago and is now growing month by month.

Here is an idea - maybe just maybe inflation is caused by changes in the money supply. The graph below shows the U.S. M2 money supply since 2010.  Clearly there is a fairly constant growth rate right up until 2020, when the slope of the line steepens drastically.  That is, M2 didn't just jump at the beginning of the COVID era, the rate of growth increased (the slope of the line) and never returned to the previous level.  In fact, M2 has increased by 40% since the beginning of 2020.  

M2 2022

Granted, M2 is an imperfect measure of our modern money supply. That said, changes in M2 of this magnitude are not irrelevant and changes in M2 can be used as a proxy for changes in the overall level of money in an economy.

Finally, some economists might argue that the new money growth is completely appropriate or necessary in this era of instability and uncertainty.  Fine, but let's recognize and communicate this clear cause of the highest inflation rate we've had since 1982.

Inflation Climbs to Highest Level in 40 Years

The new CPI data released today by the BLS shows what many of us are feeling when we buy gasoline and groceries: inflation is here and it is not going away immediately.  The year-over-year measure was up to 7% in December 2012 and this is the highest level since June 1982.  The graphic below shows annual inflation since 2000.

Inflation 0122

The table below, from the BLS report, shows increases in the major category areas.  Year-over-year increases are shown in the last column.

CPI categories 0122

Over the course of the year, you can see that gasoline prices rose 49.6% and Used cars and truck prices rose by 37.3 percent.  But even grocery prices (food at home) rose by 6.5 percent.  

This inflation won't go away anytime soon.  Even if prices don't rise at all for six months, the inflation rate will be over 4% in June because of the way this statistic is computed (using all data from the previous 12 months).  Unfortunately, prices are probably going to continue to rise throughout this spring.  


Inflation Continues

Inflation over the last 12 months in the U.S. remained over 5 percent.  The August release of  the Consumer Price Index (CPI) data indicates that prices continue to rise way above normal as the economy tries to recover from the COVID-19 recession.  The figure below shows CPI inflation since 2011.


In recent history, inflation has averaged 2% or less, but the COVID recession and Federal Reserve responses have definitely pushed up price level increases over the past year.  Prices of some items in a typical consumers budget have risen drastically in the past year.  Among the biggest increases price increases were gasoline (+42.7%), car and truck rental (+52.6%), used cars and trucks (+31.9%).  Prices that fell over the past year include cheese (-2.4%), prescription drugs (-2.7%), and music subscriptions (-1.4%).  

Inflation is Still in Check

Earlier this week, the BLS released the Consumer Price Index Report for this past month. The CPI grew at just 0.1 percent in October and 2.05% over the past 12 months.


The low overall inflation was accompanied by a 3.2% increase in shelter and a sharp 6.4% increase in energy prices. Together, shelter and energy amount to over 40% of the CPI basket weight that the BLS uses. The spike in energy prices is due to the 10.8 percent rise in energy commodities which is constituted by fuel oil and motor fuel. Since last October, gasoline prices have increased 10.8% and 39% since February of 2016.

The table below shows October price changes in different CPI categories.


Hurricanes Drives CPI Up

Consumer prices in the U.S. rose 2.2% over the past year, according to the latest Consumer Price Index (CPI) data released today by the BLS.  While inflation hovered around 1% for much of 2016, 2% seems to be the new normal in 2017. 


The CPI was up 0.5% in September alone, with about half of this due to the 13.1% increase in gas prices.  We spend a lot on gasoline (about one out of every thirty dollars for the typical consumer).  Hurricanes Harvey and Irma are certainly to blame for much of the rise in gas prices because they caused the closure of many refineries.   

The table below offers some examples of goods or services with price increases and decreases in September.

CPI Table 1017



Gas Prices Push Up CPI Slightly

Rising gas prices pushed up the Consumer Price Index (CPI) in October.  However, year-over year, gas prices were essentially constant.  In addition, overall inflation over the past year was still just 1.6%.

The table below shows changes in selected goods and services over the past year.  Notice that egg prices continue to drop drastically, but they make up a very small portion (0.1 %) of a typical consumer's budget.  Shelter (housing) prices rose 3.5% in the past year and these account for about a third (33.4%) of a typical consumers spending.   This continues the trend that began in 2010, following the decline in housing prices in the wake of the Great Recession.

CPI Table 1016



College Students Need Macroeconomics Principles

Should we ditch macroeconomics or perhaps reduce it to two weeks?  In a recent blog post, Noah Smith argues that most of the material in a Principles of Macroeconomics class isn’t really necessary.  After teaching macro principles to more than 1,000 students per year since 2003, it is easy for me to find the blind spots in Noah’s view.  More than anything, it is pretty clear that Noah doesn’t spend much time with college students. 

Let me start with what Noah gets right: students should learn the Solow model for long-run growth, and the AD-AS model for business cycle analysis.  He also includes “the standard Milton Friedman, New Keynesian, AD-AS, accelerationist Phillips Curve theory of monetary policy.”

Now we come to Noah’s first howler: he believes that this material should take “about two weeks.”  Two?  What students is he teaching?  I teach at the University of Virginia, a really great university with super students.  But this takes six weeks, not two. When my students show up for macro principles, very few even know that interest rates are market prices.  I do teach the Solow model but most Macro principles instructors believe it is just too hard for the intro level. 

More than that, Noah leaves out a host of other macro topics that students need to learn at the intro level, whether they continue in economics or not.  This list includes:

1. Key macroeconomic variables.  These need to be defined, explained, and put in their proper historical perspective.  These include real GDP growth, unemployment, inflation, and interest rates.  And not just for the United States.

First off, the way we measure these variables actually matters.  Consider that unemployment rates do not include underemployed or out-of-labor force workers.  Or that GDP only includes market goods.  Both of these are relevant for policy and have been discussed in the media recently.  And historical perspective is really key here – it can be one of the best gifts you can give your students. What is a big number or a small number?  When unemployment is 7%, is that high or low?  How about in the U.S. versus Spain?  Or when real GDP grows by 4%, is that high or low?  How about the U.S. versus Mainland China?  Most college students won’t know this without a macro principles course.

2. The loanable funds market. You can’t understand financial collapse/contagion without a good understanding of the loanable funds market.  A big part of this discussion is also forming an intuitive understanding of interest rates, which is not natural for most students.  In my principles course (and textbook) I even cover mortgage-backed securities, securitization and moral hazard now so that the students understand the Great Recession.

3. Fiscal and monetary policy. In many universities, this is the one place where real economic policy is taught - Intermediate Macroeconomics typically focuses on theoretical models.  I view these policy discussions as voter education curriculum.  Students need to know what deficits mean and something about historical perspective here too.  They also need to know where government revenue comes from and how it is spent.  Hint: it’s not all spent on foreign aid and welfare!  And what about the Fed? This is the course where students learn about Fed policy and both actual and perceived effects on the economy. 

If time permits, it is great to also throw in international trade and finance, like the balance of payments (many misconceptions arise from a misunderstanding of how capital inflows are related to merchandise trade). 

Basically, to cover all of this takes about a semester.  It is foolish to think that two weeks is enough.

By the way, my favorite macro textbook covers all of these topics clearly in a great one-semester format.

Consumer Prices Completely Flat Year-over-Year

Consumer prices dropped overall in September, according to the latest BLS estimate of the Consumer Price Index (CPI).  The CPI fell by 0.2 %, taking the index back down to the level where it was one year ago.  Think about that: many prices have risen over the past year, but the typical U.S. consumer pays the same amount for goods and services today that she did one year ago.

CPI Graph September 15

The main reason for the decline is decreasing gas prices - again. Gas prices fell by almost 30% in September. In contrast, the food index actually increased by 0.4 %.

Core CPI (the CPI index for all items except than food and energy) is helpful for some applications because it is less volatile.  This measure rose by 0.2 percent.

Basic supply and demand explains the falling price of gasoline why the costs of gasoline. New discoveries of oil and new oil extraction techniques (think fracking) have greatly increased the supply of gasoline, shifting the supply curve outwards and reducing the price of crude oil in world markets. 

The table below shows the one-year price change for selected items, along with the weight given in the CPI index. Remember that the weight is determined as the portion of the typical consumer's budget dedicated to that spending category.  For example, a typical U.S. consumer allocates 3.97 % of their monthly spending toward gasoline.  

CPI table Sep 15

Notice how many food item prices rose significantly (egg prices up another 36 percent!), but gasoline prices fell almost 30 percent.  Television and personal computer prices continue their decades-long slide downward.