11/29/21, 8:46 PM A handful of items are driving inflation in America | The Economist

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Graphic detail Nov 6th 2021 edition

The used-car conundrum

A handful of items are driving inflation in

America
Our new measure shows that this portends lower inflation—but not enough for the Fed
to lower its guard

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11/29/21, 8:46 PM A handful of items are driving inflation in America | The Economist

Inflation in America* by item, % change on a year earlier

↓ Broad-based inflation ↓ Typical distribution

Year to April 1969 Year to April 1984
Inflation 4.4% Inflation 4.4%

Year to May 2021

Car insurance +57%

Eggs +22%

Personal computers -18%

Doctors’
Housing +2%
Spectator sports -5%

25 50
Package tours -2%
Percentile of price change

-20

C onsumer-price inflation has risen to 5.4% in America, the highest in 30

years. On November 3rd the Federal Reserve said it would taper bond
purchases, a step towards higher interest rates. Most economists say that this
bout of inflation is a result of temporary disruptions caused by covid-19, and
that it will pass. But some think it presages a longer-term trend.

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11/29/21, 8:46 PM A handful of items are driving inflation in America | The Economist

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A leading argument by inflation doves has been that just a few items have

caused a large share of total price increases. In the quarter to August used cars,
hotel rooms and airfares made up less than 5% of America’s consumer-price
index, but together accounted for the majority of overall inflation. “This is really
extreme,” Paul Krugman, an economist, wrote at the time, “and does suggest
transitory bottlenecks rather than broad-based inflation pressure.”

This case rests on two claims, which both merit scrutiny. One clearly stands up:
when compared with past periods with similar inflation, current price rises are
indeed unusually concentrated. The other—that inflation is likely to slow down
as a result—is also broadly true. However, this effect is too small for the Fed to
breathe easy.

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T t t th h th b ilt d t t f i l
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11/29/21, 8:46 PM A handful of items are driving inflation in America | The Economist
To test these hypotheses, we built a dataset of price levels since 1959 for every
item—from housing to lottery tickets—in the personal consumption
expenditures (pce) index, one of the Fed’s preferred metrics. For each rolling 12-
month period, we calculated a measure of how much price changes vary
between items: their standard deviation. When a few components account for a
large share of inflation, this number is high. When most items’ prices change by
similar amounts, it is low.

In general, standard deviations are correlated with inflation: the higher the
average increase in prices, the more specific items’ price changes differ from
each other. However, some eras were unusual, with inflation that was either low
but concentrated, or high but broad. To identify such outliers, we measured the
“excess” concentration of inflation in each time period: the gap between the

actual standard deviation of price changes and what you would expect based on
overall inflation.

This measure is now abnormally high. During the year to May inflation was
more excessively concentrated than in 97% of rolling 12-month periods since
1961. It has dipped slightly as used-car prices have levelled off, but still sits in
the 89th percentile.

What does this mean for future inflation? Historically, when excess
concentration has been high, the present has been a poor guide to the future.
When inflation is above its ten-year average, as it is now, high excess
concentration makes it more likely to fall. This pattern should lead forecasters
to reduce their predictions for inflation.

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11/29/21, 8:46 PM A handful of items are driving inflation in America | The Economist

→ Four ways to weight an inflation index

Headline inflation* Core inflation

Weights items at their share of consumer spending Excludes food and energy prices Weight ratio,
May 2021
1.5x
Prescriptions Housing Petrol Food Housing Petrol
Equal to
Food headline

0.5x

← Lower Percentile of price change Higher → ← Lower Percentile of price change Higher →

Trimmed-mean inflation “Uluru” inflation

Excludes products with big price swings Smoothly reweights items Weight ratio
May 2021
2.5x
Housing

2.0x

1.5x

Housing Equal to
Food headline

Prescriptions Petrol
Petrol
05
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