When we last checked in with the monthly consumer price index, headline inflation was running at an annualized 1.2% pace as of this past July, off sharply from 2.7% in January, the Labor Department reported. Clearly, the trend so far this year is down. The question is whether we’re headed for even lower rates of inflation? Or deflation?
The future’s always open to debate, of course, but it’s clear that disinflationary momentum has had a head of steam lately. One reason for thinking the trend might roll on comes from separating so-called sticky components of CPI from the flexible parts. A study by the St. Louis Fed finds that the flexible component prices are quite volatile while the sticky ones are relatively calm. What’s the relevance? As one of the study’s authors explained last week, “sticky-priced components tend to be more forward-looking and better indicators of future inflation.” He goes on to report:
Recently, the growth rate in the sticky CPI has been quite soft relative to its longer-term (five-year) trend growth rate of 2.3 percent. Also, compared to the core CPI, the sticky CPI has been on a sharper disinflationary path over the last two years—falling from a 12-month growth rate of 3.1 percent in mid-2008 to just 0.8 percent as of July (a series low with data back until 1968). Moreover, in July the sticky CPI rose 0.9 percent, consistent with its near-term trend, while the flexible CPI jumped up 11.4 percent after three consecutive monthly declines. After stripping away food and energy prices from the flexible price series, it still rose 5.2 percent in July and is up roughly 6.0 percent over the past three months, compared to its three-month annualized growth rate of −0.1 percent through the first three months of this year. Based on this evidence, it seems that the price increases from the more volatile flexible price series have been putting upward pressure on some underlying inflation measures, while the sticky-price series has continued on its subdued (but positive) inflation trend.
A chart from the St. Louis Fed tells the story:
Is this a smoking gun that guarantees inflation will continue falling in the months ahead? No, but it’s one more reason to think twice before dismissing the disinflation/deflation risk. Sticky prices of late suggest that we go lower yet.
Meantime, the August update on consumer inflation arrives later this month, on September 17.