When it comes to inflation gauges, many advisors and clients know about the Consumer Price Index (CPI). Some know that there are two primary ways rising costs are calculated – a broader number and one excluding supposedly volatile energy and food prices.
For many investors and consumers, inflation examination is a wonky endeavor. Most simply care about how a rising CPI impacts their portfolios and personal bottom lines. And the bottom line is that the CPI is making its way higher.
“The headline reading for the Consumer Price Index (CPI) for May—a 5.4% increase from the year before—was the highest jump in inflation since the 2008 financial crisis. Core CPI (which excludes the volatile food and energy prices) rose 3.8% from the year before, the fastest pace of inflation since 1992,” says Nationwide’s Mark Hackett.
In that note, Hackett explored a concept many investors aren’t aware of: flexible and sticky inflation. The Atlanta Federal Reserve explores these concepts, which are easily explained in practicality.
Flexible inflation pertains to goods and services with frequent price changes. Think automobiles, hotel rooms, theme park admission prices, and eating out. Conversely, sticky inflation “includes items where prices changes occur relatively slowly—e.g., rent, education, health care, and personal care,” according to Hackett.
Predictably, a comparison of flexible and sticky CPI readings can bring both good news and bad news. Last month, the flexible CPI surged 12.4% on a year-over-year basis. As Nationwide’s Hackett notes, that’s the biggest increase since 1980. On the other hand, sticky CPI was up 2.7% last month, modestly above the Fed’s desired 2% range, but not alarmingly high.
And for those looking for more encouraging signs, it’s likely both forms of inflation will be tempered in the months ahead.
“Given the path that inflation followed last year, both flexible and sticky CPI are likely to moderate in the coming months with an expected decline more pronounced in the flexible reading,” adds Hackett. “Evidence indicates the flexible price measure is more responsive to changes to the economy, while sticky CPI tends to be more forward-looking and reliable indicator of future price rises.”
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