Inflation: The Chicken Little problem of the last five years. Everyone thought it, or hyperinflation, was coming. Meanwhile, the Federal Reserve was worrying about deflation. Our central bank targeted a 2 percent inflation rate as healthy and worried when it was lower. Inflation has obediently averaged a 2.1 percent annual rate since 2010, albeit with some big swings.
Now evidence suggests this is about to change. If correct, inflation will be closer to 3 percent this year and beyond. Let me show you the evidence. You can judge for yourself.
Every month the Bureau of Labor Statistics reports the change in the Consumer Price Index. The report is for a specific index, CPI-U, an index for urban populations that covers what most of us experience. The CPI-W— used for calculating the increase in Social Security benefits— is reported at the same time. The two indices are identical in methodology. The only difference is that the CPI-W covers a smaller sample group.
Here’s the troubling evidence. In June, the last month for which a report is available, the CPI-U increased by a worrisome 0.3 percent for the month— after increasing 0.4 percent in May and 0.3 percent in April. The part of the index followed by the Federal Reserve— all items less food and energy— increased by only 0.1 percent for the month and 1.9 percent for the previous 12 months. The Federal Reserve watches inflation in its particular way because food and energy prices are volatile. They can overstate the general rate of inflation.
But the Federal Reserve lives in its own world. The rest of us live in another. Our world is a bread and butter kind of place where changes in the price of food and gasoline are pretty important.
Food and energy, however, aren’t as important as the cost of shelter. The cost of shelter is the single largest item in the consumer price index, accounting for nearly 32 percent of it. The figure is calculated with a complex blending of rents and homeowner’s equivalent rents.
As a practical matter, lots of people spend more than 31 percent of their after-tax income on shelter. Some people spend 50 percent in our painfully expensive cities. In America, shelter costs are like food costs in poor nations. When the price of food soars in poor nations people suffer. Here, high rent increases can cause real hardship. High rents can also cause spending in other areas to drop.
And shelter is where the evidence says we should be concerned. In June the index for shelter rose 0.2 percent, after rising 0.3 percent in May and 0.2 percent in April. Over the preceding 12 months the rate was 2.8 percent. To put that figure in perspective, the average increase in wages over the same period was only 2.3 percent. Shelter costs are rising faster than wages.
The second largest part of our living expenses is food. It clocks in at 13.85 percent of the CPI-U index. In June it rose only 0.1 percent over the previous month, but it had risen 0.5 percent in May and 0.4 percent in April. For the preceding 12 months it was up 2.3 percent, with most of the increase in the last three months. Meat, the largest single element in our food spending, rose a scary 7.5 percent over the year.
The next largest spending categories, medical care and transportation, at 5.8 and 5.5 percent of the CPI-U, respectively, were mixed bags over the last year. Physician’s services rose only 1.1 percent. Motor vehicle maintenance and repairs rose only 1.6 percent. But hospital services rose 5.9 percent. Car insurance rose 4.9 percent. And airfares rose 5.3 percent.
This suggests that an inflation rate of 2 percent is behind us. A higher inflation rate, closer to 3 percent, may be coming our way. Is it inevitable? No. But the most telling place to watch is shelter, the Big Dog in expenses for most Americans.
(If you find this depressing, you can take refuge in drink. Alcoholic beverage prices have risen only 0.9 percent over the last 12 months.)