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Inflation Remains Weak

As widely expected by market participants, inflation numbers from the U.S. continued to get worse. The Bureau of Labor Statistics’ seasonally-adjusted monthly data for the headline and core CPI both failed to meet forecast. The headline CPI was flat, while the core CPI showed a disappointing 0.1% gain.

The BLS inflation data is consistent with the Fed’s preferred inflation measure, the Core PCE Price Index. The Core PCE Price Index currently stands at 0.2%, which is also below the 2.0% inflation target of the central bank.

The data dictates that inflation is definitely low, but is that enough? Should we trust these two reports completely to determine where prices are going? The fact of the matter is that they are lacking. The headline CPI includes volatile food and energy prices, which makes them unreliable.

The core CPI excludes both these components but that’s about it. The core CPI still includes some items that aren’t “food” or “energy” but are chronically volatile.

And finally, the Core PCE Price Index only removes the 8 percent of items that increased most each month and the 8 percent that rose least. This act of removing the extremes of the range gives us a more stable number each month, but the component makeup of that number may not be consistent.

What should you pay attention to instead?

Enter, the Sticky Price CPI. Published monthly by the Federal Reserve Bank of Atlanta, the Sticky Price CPI sorts the components of the consumer price index (CPI) into either flexible or sticky categories based on the frequency of their price adjustments. A good or service is called “flexible” if its price changes very fast. On the other hand, a good or service is called “sticky” if its price is resistant to change.

A newspaper is an example of a sticky good. Its price over the last few years or so hasn’t really changed much. Also, the way newspapers are sold–in machines that don’t give change and at newsstands where you put down your money, grab a paper, and go–make it almost a requirement for people to pay an exact amount. Increasing the prices to 55 or even 60 cents would be impractical, even though it would bring it in line with the inflation.

Focusing on the Sticky Price Index is a good idea because the index reflects price trends that are expected to persist. It does not limit the exclusions to only food and energy like the core CPI. It does not have a set number of exclusions like the PCE price index.

You could say that it’s the most in-depth version of the core CPI. As the chart below shows, the rate of increase of the Sticky Price Index has been falling after it had topped out in January this year. It continues to fall even after the Fed chose to extend Operation Twist.

If the Sticky Price Index is indeed an effective indicator of future inflation, then it’s just another reason for the Fed to move towards more stimulus at its next meeting.