An interesting thing we would like to point out in Fed Governor Chris Waller’s speech on Monday, other than the fact that he was quite hawkish, is that he started using inflation breadth to illustrate the disinflation issue.
The increases recently are quite broad. For core services, which accounts for 75 percent of core prices, nearly 70 percent of its categories have 3-month and 12-month inflation over 3 percent.
As we have previously mentioned, inflation breadth can be an effective communication tool for central banks to explain the underlying inflation as it’s a relatively easy-to-understand concept, compared to excluding certain components from “core” inflation calculations.
In the speech, Waller used the PCE price index, the Fed’s preferred inflation gauge, for the analysis. Here, we use the June CPI data to explore whether the inflation breadth has closed as oil prices dropped.
Overall, 50% of the 179 items in CPI calculations were rising more than 3% YoY in June. This continues the declining share from its recent peak in April with close to 55%; at the same time, the share of items with below 1% inflation stepped up to 29%, from a recent low of 23.3%. Disinflation is indeed in progress in terms of inflation breadth.
Of the 179 CPI items being tracked, we can decompose overall CPI into four categories: food, core goods, core services and energy, and further observe the share of items within these categories that saw inflation rising more than 3%, between 1-3% or lower than 1%. (Energy, though, is a category with very few items so the exercise won’t be too useful for it.)
Waller mentioned that, on the PCE price index side, core services saw about 70% of prices rising more than 3% over the 12 months to May. On the CPI side, the picture was similar. In the year to June, 64% of the items in core services rose more than 3%, a step down from 67% in May. Meanwhile, the share of 1%-3% inflation was rising in the month; the share of below 1% price growth continued to decline.
While the core services picture improved, it is still very far from the level that is consistent with 2% overall inflation.
Meanwhile, food and core goods showed much more encouraging signs. Food’s above 3% share was dropping to 45%, while the share within the range of 1-3% was rising rapidly.
Core goods, the subcategory that is said to be most affected by tariffs, not only saw the share of above 3% dropping, but also the share of items with below 1% inflation shot up rapidly, which could be a sign that the tariff effect was fading.
Still, core goods disinflation plays a substantial role in the overall inflation slowdown process. Below is the average share of the three inflation rate ranges in each category for the 20 years between 2000 and 2019. One outstanding reading is that core goods had a 65.6% average share of inflation below 1%.
Table 1: Average monthly share of components by YoY-growth speed, Jan 2000 – Dec 2019
| Category | above 3% | 1% to 3% | below 1% |
|---|---|---|---|
| Food | 34.1 | 26.2 | 39.7 |
| Core services | 45.1 | 33.6 | 21.2 |
| Core goods | 15.9 | 18.5 | 65.6 |
This is the result of the globalization of manufacturing bringing down product prices in those 20 years. It was one of the main factors supporting the era’s low and close-to-target inflation rate.
Now that share is still less than 40%. Will it reach back to above 60%, a level last seen since early last year? This is an important data point reflecting whether disinflation is continuing or not.
