Everyone knows inflation is on fire. Here’s what really powers it

Meat is seen in a supermarket as rising inflation affects consumer prices in Los Angeles, California, June 13, 2022.

Lucy Nicholson | Reuters

Inflation doesn’t just happen at the gas pump and the grocery store. There are literally hundreds of avenues that filter into broader metrics that the government uses to assess price increases.

The three big inputs to the consumer price index, the most widely followed measure of inflation, are food, energy and housing.

Together, they represent about 54% of the CPI. More importantly, however, is the key data on inflation perceptions.

Because shopping for groceries and refueling are activities that people do a lot, they tend to notice price fluctuations even more. This is especially true for gasoline prices, even though they represent only a small part of the household budget.

“Those are the basics,” said Tom Porcelli, chief US economist at RBC Capital Markets. “That’s what you have to spend money on. You have to spend money on housing, you have to spend money on food, and most of us have to spend money on energy. [Inflation] represents a significant issue for consumer spending.”

But when it comes to determining where CPI inflation actually comes from, the answer is more complicated.

In fact, the largest component is what the Bureau of Labor Statistics calls “services minus energy services.” Think big-ticket items like shelters, but also more obscure items like lawn care companies, vet bills, and car rentals. Together, this group represents 57% of the CPI.

The second largest category: “commodities less food and energy products”. These are household goods, appliances and clothing, and this category represents 21.4% of the index.

In fact, despite all the headlines for gasoline prices, the CPI’s two smallest weights are both for energy: energy products, such as fuel oil and propane, make up 4, 8%, while energy services, including electricity and piped gas, contribute 3.4%. % to CPI.

Economists, like those at the Federal Reserve, will strip out food and energy costs and look at “core” inflation to get what they think is a better picture of inflation that excludes wildly fluctuating prices. Core inflation in May rose 6% from a year ago, while headline inflation was up 8.6%.

Even Fed Chairman Jerome Powell acknowledged on Wednesday that now was probably a good time to focus on inflation overall.

“Public expectations, why would they distinguish between core inflation and headline inflation? said the head of the central bank during his press conference after the meeting. “Core inflation is something we think about because it’s a better predictor of future inflation, but headline inflation is what people are going through. They don’t know what core is Why would they?

The Fed is trying to get inflation under control by raising interest rates, but that hasn’t done much so far.

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