What is inflation?
Inflation is defined by the Bureau of Labor Statistics as the general upward price movement of goods and services in an economy. There are many ways of measuring inflation, but one of the most common measures is the Consumer Price Index for Urban Consumers (CPI-U). The CPI shows changes in the prices paid by urban consumers for a “representative basket of goods and services,” or the most common goods and services purchased on an average month based on detailed surveys of what Americans spend their money on. The urban consumer group represents about 93% of the total US population.
There are four major categories of purchases covered in the CPI-U: food, energy, commodities like cars and clothes, and services like rent and healthcare. Not all categories are considered equally when generating the overall measure of inflation — each category is assigned a “relative importance” based on its proportion of all expenditures. Services typically are given the highest relative importance (in April, 59 on a scale of 100), followed by commodities (about 20), food (about 14) and energy (about 7).
The overall CPI, also known as “headline” CPI, is measured by the percent change in these CPI categories from one period to another. Since food and energy categories are typically much more volatile than the other parts of the CPI, economists often focus more on a metric called the “core” CPI which excludes these two categories.
The Federal Reserve aims to keep long-term inflation around 2% to balance its dual mandate of maximizing employment while keeping prices stable. The Federal Reserve typically focuses more on another measure of inflation called the Personal Consumption Expenditures (PCE) price index which is somewhat more stable than the CPI-U. Inflation as measured by the core CPI-U is typically about half a percentage point higher than the PCE index.
Is inflation going up?
When looking at the percent change in the core CPI-U from 12-months before, inflation has largely been below the Federal Reserve’s target rate for the past five years, which would generally adjust to around 2.5% for the core CPI-U. However, overall prices in April were up 4.2% from a year earlier and 0.8% from March.
While overall inflation has not reached the levels seen during the Great Recession, prices for some purchases have seen volatile changes throughout the pandemic. For example, gas prices are 50% up from a year ago, and used car prices are up 21%.
Average gas prices from a sample of about 900 gas stations across the country were $2.77 a gallon in April, over a dollar above the average price last year at this time, according to data from the Energy Information Administration. Used car prices hit their highest price levels since the data for the CPI-U began in 1953.
Price changes have not occurred at the same pace across the country. For example, in April 2021, the St. Louis and Detroit metropolitan areas saw a 5.4% increase in CPI-U from March, nearly twice as high as the rate of 2.9% in the Baltimore area.
Will inflation start to climb faster?
USAFacts does not conduct its own forecasts or projections. However, the government does produce its own measure of expected inflation called the “breakeven” inflation rate. The breakeven inflation rate is created using the Treasury yield curve, which represents the spread between long- and short-term yields on Treasury securities (e.g. between 10- and 2-year Treasury notes). The breakeven inflation rate is the future inflation rate during a period of five or ten years that, if realized, would be equal to the return obtained from nominal Treasury securities and Treasury Inflation-Protected Securities (TIPS). In this way, it measures how much investors expect inflation to rise in a period of time based on their appetite for certain types of securities.
The 10-year breakeven inflation rate is currently at its highest level since 2013 and the 5-year breakeven inflation rate is at its highest level since 2008, indicating an expectation of rising inflation. The Treasury Breakeven Inflation rate, among other yield curves, is imperfect and can be distorted by variables like temporary movements in liquidity in times of economic crisis. Nevertheless, it is a variable considered by both government officials and investors as a measure of whether inflation may be on the horizon.
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