Investment Research
A Look under the Hood of
US Consumer Price Inflation
Ronald Temple, CFA, Managing Director, Co-Head of Multi-Asset and Head of US Equity
David Alcaly, Research Analyst
US consumer price inflation has been relatively low and stable for two decades. In recent years, investors have worried
that already low inflation could fall further. We now believe that the US economy has reached the point where the risk
for inflation is to the upside. Building cyclical pressures were partially concealed by the steep fall in oil prices, an effect
which is now fading. Similarly, major policy change could add structural inflationary pressures. In our view, these risks
have critical implications for investors’ portfolios.
In this paper, we review longer-term trends in consumer prices, discuss key drivers of inflation, as well as analyze recent
developments and their potential to contribute to future inflation. Our medium-term expectation is for core inflation to
continue to grind higher, but significant government policy changes could change this outlook.
2
Introduction
The last time the United States experienced core Consumer Price
Index (CPI) inflation over 3% was in 1995. Investors have grown
accustomed to low, stable inflation rates and even worried after the
global financial crisis about the potential for deflation. We believe
the US economy has reached the point where the risk for inflation
is now to the upside.
Reflecting this reversal, market-based measures of inflation
expectations bottomed in February 2016 and have climbed
since, supported by higher energy prices and a stronger economy
(Exhibit 1). The US election in November 2016 contributed
further by raising the possibility of policy-related stimulus for an
economy already at or near capacity.
In this paper, we review longer-term trends in consumer price
inflation, discuss key drivers of inflation, and analyze recent
developments and their potential to contribute to future inflation.
Our analysis indicates that inflation pressures have been building
over the last two years but were obscured by falling oil prices. With
the turn toward higher oil prices early in 2016, these pressures
might now become evident.
Looking ahead, our medium-term expectation is for core inflation
to continue to grind higher and to hit cycle highs. Significant
policy changes from Washington, D.C. could change this outlook.
Importantly, inflation risk has returned for the first time in years.
Current Inflation in Context
Persistently high peacetime inflation has only occurred once in the
past century, during the Great Inflation of the 1970s.1 However,
we believe that investors don’t require “great inflation” to need
an inflation hedge and that it is important to protect against the
corrosive effects of inflation on purchasing power, even if it is
inflation of 2%–3%. For example, a 0.25% month-on-month
increase in CPI—or about 3% annualized—compounds to a
14% loss in purchasing power over five years. Furthermore,
an individual’s exposure to inflation reflects his or her specific
expenditures, which can easily differ from the components of
CPI. As an example, the Forbes’s Cost of Living Extremely Well
Index tracks 40 luxury items, for which prices have increased at an
average annual rate of 5% since 1982, a pace two percentage points
higher than CPI.2
Following the Great Inflation, consumer price inflation moderated
significantly and since the mid-1990s the year-on-year change in
core CPI, or CPI excluding volatile food and energy prices, has
been relatively low and stable (Exhibit 2). In fact, the last time core
CPI topped 3.0% was in December 1995.
The commitment of central banks to fighting inflation is widely
credited for contributing to the multi-decade moderation in
inflation. Policymakers and economists coalesced around a number
of beliefs regarding the drivers of inflation as this commitment
took hold. The general theory has been that price increases follow a
stable trend, with deviations explained by:
• the economic cycle and overall level of resource use in the
economy, i.e., “demand-pull” inflation;
• an independent shift in the cost of important inputs, like energy
or imports, i.e., “cost-push” inflation;
• the de-anchoring of inflation expectations from trend, which
could become self-reinforcing as prices respond to expectations,
which then respond to prices; or
• inappropriate monetary policy for the economic and fiscal
environment.
Exhibit 1
Inflation Expectations Bottomed in February 2016
(%)
3
2
1
0
2012
5-Year, 5-Year Forward Inflation Expectation
10-Year Breakeven Inflation
5-Year Breakeven Inflation
2013
2014
2015
2016
2017
As of 25 January 2017
The 5-year breakeven inflation rate is the 5-year Treasury Yield at constant maturity
minus the 5-year inflation-indexed Treasury Yield at constant maturity (TIP). It can be
interpreted as the implied inflation rate over the next 5 years. The 10-year breakeven
inflation rate is the 10-year Treasury Yield at constant maturity minus the 10-year TIP
at constant maturity. It can be interpreted as the implied inflation rate over the next 10
years. The 5-year, 5-year forward inflation expectation rate is the average inflation rate
that the 5- and 10-year TIP yields indicate the market expects in years 6 through 10.
Source: Federal Reserve Board, Haver Analytics
Exhibit 2
Core Consumer Price Inflation Has Been Moderate since the
Mid 1990s
Y/Y Change (%)
15
2%–3%
Core PCE
Core CPI
12
9
Recession
6
3
0
1960
1974
1988
2002
2016
As of 31 December 2016
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics,
National Bureau of Economic Research
3
However, as US Federal Reserve Chair Janet Yellen pointed out in
October 2016, the experience since the global financial crisis has
raised significant questions about how decisive these factors are and
invited further research on “what determines inflation.” Among
other uncertainties, she pointed out that it had been surprising
that inflation remained relatively high following the crisis, even
as unemployment hit 10%, just as it was subsequently surprising
that inflation did not rise more as the economy recovered and
unemployment fell below 5%.3
Yellen’s observations implicitly raise questions about whether
the beliefs developed in response to the Great Inflation are still
applicable in light of how the global economy and expectations
regarding monetary policy have evolved. For example, the financial
economy is much more international and the real economy is more
influenced by global supply chains and competition. Also, a smaller
portion of the economy has mechanisms such as cost-of-living wage
adjustments that “build in” inflation than was the case in the past.
Moreover, central banks have established significant credibility in
Exhibit 3
CPI Is Dominated by Housing; Health Care Is Important to PCE
Share of Headline Index (%)
Headline index
Food
Energy
Core index
Food & beverages
Housing
Rent of primary residence
Owners’ equivalent rent
Other housing
Transportation
CPI
PCE
Difference
100.0
100.0
0.0
14.3
7.3
6.9
8.0
4.3
3.7
77.7
88.4
-10.6
1.0
5.6
-4.6
38.1
21.4
16.7
7.2
4.0
3.2
24.3
11.5
12.9
6.6
6.0
0.7
11.3
6.8
4.5
Apparel
3.3
3.2
0.1
Medical care
7.7
22.6
-14.9
Recreation
5.8
8.8
-3.1
Education
3.3
2.3
1.0
Communication
3.7
2.4
1.3
Other goods & services
3.4
15.0
-11.6
0.2
6.0
-5.8
2.2
-2.2
6.8
-3.6
Financial services
PCE items out of CPI scope
All other
3.2
As of 31 December 2015
Components are by major function and not directly equivalent. PCE shares are
approximations. Core “food & beverages” for CPI are alcoholic beverages and for
PCE are “food services”. For PCE, net health insurance has been reclassified from
“financial services” to “medical care” and accommodations away from home have
been reclassified from “food services and accommodations” to “housing”. PCE
items out of CPI scope includes net foreign travel and expenditures and spending by
nonprofits on behalf of households.
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics,
Goldman Sachs
fighting inflation and slow growth is generally a bigger concern
than inflation. Some have also argued that new technologies have
reduced the social costs of higher inflation and that the current
environment of very low interest rates means that central banks
ought to target higher levels of inflation, to give themselves more
room to adjust real interest rates in response to a recession.4
Broader questions aside, trends in the components of consumer
price inflation—both what is consumed and the change in prices
of different items—reflect structural changes in, and the cyclical
strength of the economy. They also help explain the immediate
sources of past inflation and potential future changes in the pace
of inflation. In order to help better understand these sources and
potential future changes, in the next section we discuss:
• the two price indices most commonly used to measure consumer
price inflation;
• key differences between these indices, which impact both what
they measure and how they measure it; and
• trends in prices changes for key components of these indices that
help explain the path consumer price inflation has taken over the
past two decades.
Trends in Consumer Price Inflation
US consumer price inflation is most commonly measured with
two indices:
• The CPI is the more widely cited measure of inflation and is
used to calculate price changes for economic data like real wages,
financial instruments like Treasury Inflation-Protected Securities
(TIPS), cost of living adjustments in tax brackets, government
programs like social security, and collectively bargained wages.
• The Personal Consumption Expenditures (PCE) price index
is the deflator for consumption’s contribution to GDP in the
National Income and Product Accounts and is the preferred
measure of the US Federal Reserve.
Among the key differences between the two indices, the CPI covers
out-of-pocket expenses only, while the PCE price index captures
all spending on behalf of households including those paid for by
third parties, like Medicare or employer health care benefits. The
CPI is calculated using fixed weights for its components (which
are updated every two years), while the PCE price index evolves
each month in line with consumer spending. Since the PCE price
index captures substitutions that consumers make when one
item’s price increases more quickly than another’s, it typically rises
less rapidly than the CPI does.5 For these reasons of “scope” and
“formula,” we prefer the PCE price index, although the CPI is
obviously important as well. In part, our logic is based on the idea
that individuals ultimately pay for all of the services they consume,
whether directly, through taxes, or indirectly, through lower wages.
4
The differences between the CPI and PCE mean that the weighting
of their components differs significantly (Exhibit 3, page 3).
Housing is only 21% of PCE and nearly 40% of the CPI basket.
On the other hand, medical care is roughly 25% of PCE and just
8% of CPI, reflecting the substantial proportion of health care
payments that are made by third parties. Food and energy costs
make up a little over 20% of the headline CPI basket versus a little
over 10% of nominal PCE.
Measuring The Cost of Home Ownership
Both the CPI and PCE price indices include two main
components in their measurement of housing service
costs—the cost of renting tenant-occupied housing and
the estimated cost of renting owner-occupied housing.
The latter component seeks to address a conceptual
problem with using house prices to measure the cost of
home ownership.
Many people buy a home not just for shelter but
also as an investment. While the latter function is
embedded in house prices, it is not theoretically a cost
of living. For that reason, both consumer price indices
measure “rental equivalence,” or an estimate of what
homeowners could have earned if they rented out their
homes rather than living in them.
A variety of factors have contributed to the diverging trends in the
prices of durable goods and services. For example, innovation in
production techniques and related quality improvements as well as
increased competition from globalization and new sales channels
have been deflationary forces.6 Regardless, one implication is
that much of the inflation experienced since the mid-1990s has
been driven by the rising costs of health care and housing. Put
another way, the declining price of durable goods reduced overall
inflation. To focus on the pre-crisis trend, the average year-on-year
change in prices for core PCE from 1996 to 2006 was 1.7%, while
the average for core goods PCE was -0.8% and for core services
PCE was 2.8%, implying that the drag from falling goods prices
Exhibit 4
Health Care Has Grown in Importance; Food and Clothing
Have Shrunk
Nominal PCE by Component (%)
100
Other
75
Education
Looking at the PCE price index in three broad categories illustrates
the longer-term trends behind the moderate inflation experienced
since the mid-1990s (Exhibit 5):
• prices for services have nearly doubled;
• prices for durable goods have declined by 30%; and
• prices of non-durable goods—mostly food, energy, and
clothing—have increased 54%, but have been more erratic given
the volatility of the underlying commodities themselves.
Recreation
50
Medical care
Apparel
Transportation
25
Housing
Energy
0
The weighting of these components has shifted over time,
reflecting changes in consumption patterns, in the structure of
the economy, and in relative prices. For example, in 1950, food
accounted for 28% of PCE versus 13% today, apparel accounted
for nearly 11% versus 3% today, and medical care accounted for
just 5% versus 23% today (Exhibit 4). These shifts make sense as
household real income levels rose substantially during this period,
leaving more money available for purchases beyond the basics of
food, clothing, and shelter. They also are consistent with changes
in the overall economy—84% of private nonfarm payroll jobs
are in service-providing industries and 16% in goods-producing
industries today, versus 44% and 56% respectively in 1950.
Communication
Food
1950
1970
1985
2000
2015
As of 31 December 2015
Annual data. “Medical care” includes net health insurance. “Housing” includes
accommodations away from home. “Food” includes food away from home. “Other”
includes net foreign travel and expenditures and spending by nonprofits on behalf of
households.
Source: Bureau of Economic Analysis, Haver Analytics
Exhibit 5
Durable Goods Prices Are in Multi-Decade Decline while
Services Prices Have Risen
PCE Chain-Type Price Index, 1990 = 100
Services
200
All Items
150
Nondurable
Goods
100
Durable Goods
50
Recession
0
1990
1995
2000
2005
As of November 2016
Source: Bureau of Economic Analysis, Haver Analytics
2010
2015
5
reduced core PCE inflation by more than a percentage point
(Exhibit 6). One consequence is that consumers most exposed to
service categories have seen their purchasing power erode more
rapidly than that of the overall population.
Emerging Inflationary Pressures
From the second half of 2015, as the US economy continued its
long recovery from the financial crisis, measures of core inflation
very gradually began to increase. Core PCE rebounded from a
near-term low of 1.3% in July 2015 to 1.7% in November 2016
while core CPI rose more rapidly, widening the gap between the
two measures. Nonetheless, acceleration has been slow, due at least
in part to headwinds from the plunge in oil prices, the strength of
the US dollar, and weakness in the global economy.
Exhibit 6
Durable Goods Prices Dampened Inflation
Y/Y Change in PCE (%)
4
3
2
1
0
-1
-2
-3
1996
Recession
2001
2006
Services excluding Energy
Core PCE
Goods excluding Food & Energy
2011
2016
Average, 1996–2006
Average, 1996–2006
Average, 1996–2006
As of November 2016
Source: Bureau of Economic Analysis, Haver Analytics
Exhibit 7
Energy Base Effects Will Lift Headline CPI in the Short Term
The passthrough effects of these factors to other prices are not fully
clear, but it is suggestive to us that the recent rise in core PCE
roughly coincided with the fading base effects of low oil prices. In
the meantime, if energy prices remain at current levels, we believe
these base effects of low oil prices should mechanically lead to a
short-term burst in headline measures of inflation. For example, if
the CPI energy price index were to remain at its current level and
prices for the rest of the CPI basket were to continue to increase at
their current rate, headline CPI would increase by 2.5% year-onyear in February 2017, before moderating in subsequent months
(Exhibit 7).
Looking more closely at the other components of the PCE shows
that inflation has not grown faster because services prices are rising
less rapidly than they did before the crisis (Exhibit 8). Perhaps
surprisingly, this is not due to housing, despite the pre-crisis
housing bubble. Although December 2016 PCE housing inflation
of nearly 3.6% year-on-year remains below its pre-crisis peak of
4.3%, it is higher than the average for the pre-crisis expansion and
has risen steadily from a low of -0.2% in May 2010.
A significant slowing in health care price growth has played a large
role in holding back services inflation in recent years. In fact, PCE
health care inflation has declined steadily since the crisis, reaching
lows in late 2015 before climbing modestly in 2016. However,
CPI medical care services has risen much more rapidly during
this period (Exhibit 9, page 6), in part reflecting that it covers just
out-of-pocket expenses and not payments made by third parties.
Legislative change and a slowing in payments made by Medicare
and Medicaid—which directly account for roughly half of health
care expenditures—explain a large portion of the slowing in PCE
health care inflation. Looking ahead, Medicare and Medicaid
payments are forecast to continue to grow at very slow rates for
several years, though these projections are underpinned by policies
Exhibit 8
Core Services Are a Drag on Current Inflation
Y/Y Change, CPI-U All Items (%)
Y/Y% Change
6
Category
Actual
4
Projection
2
0
-2
2004
2007
2010
2013
2016
As of December 2016
PCE
% of PCE
Current
2002–2007
Average
Difference
100.0
1.62
2.30
-0.68
Food
7.1
-1.57
2.31
-3.88
Energy
4.1
5.67
9.13
-3.46
Core PCE
88.8
1.70
1.94
-0.24
Core goods
22.8
-0.44
-0.87
0.43
Core services
65.9
2.45
3.06
-0.61
Housing
15.8
3.64
3.13
0.52
Health care
17.0
1.40
3.33
-1.93
Calculation is an approximation, using current CPI-U weights, the current year-onyear pace of growth in the CPI-U excluding energy index, and the current level of
seasonally adjusted CPI-U Energy index. Forecasted or estimated results are not a
promise or guarantee of future results and are subject to change.
As of December 2016
Source: Bureau of Labor Statistics, Haver Analytics
Source: Bureau of Economic Analysis, Haver Analytics
Shares are approximations.
6
that are likely to change.7 Furthermore, Goldman Sachs has
estimated that only half of the current gap between the two health
care indices can be explained by differences in their “scopes,”
suggesting that PCE health care inflation could accelerate modestly
going forward.8
China’s which, inclusive of the impact of commodity prices,
exited 54 consecutive months of negative year-on-year growth
in September 2016. As a consequence of this global trend, US
non-petroleum import prices have risen from a low of -3.7% in
December 2015 to 0.0% year-on-year growth in December 2016.
Other more general indicators also are consistent with mounting
inflationary pressures. For several years, there has been considerable
ambiguity over how much slack remains in the US economy.
Strong employment growth and a falling unemployment rate
suggested an economy approaching its potential, while broader
indicators of labor market slack and slow wage growth suggested
additional weakness, in our view. However, wage growth has
gradually accelerated, rising from an annual rate of roughly 2.0%
in the beginning of 2015 to nearly 3.0% at the end of 2016, close
to pre-crisis levels of roughly 3.5% (Exhibit 10).
Conclusion
Wages are not just a measure of resource use in the economy,
they also are an input for production. While there is uncertainty
over which direction causality runs (i.e, are higher wages a source
or a consequence of inflation?) it is worth noting that labor
productivity has been very low in recent years and that if wages rise
more rapidly than inflation plus output per hour, employers ought
to feel pressure to raise prices. However, the currently low levels of
business investment and relatively high margins suggest businesses
could choose to respond to these pressures in alternative ways.
Also reflecting rising commodity prices and a stronger economy,
producers’ selling prices have begun to rise more rapidly in recent
months, both for domestic producers and globally. The US core
producer price index (PPI) for final goods has been accelerating
since mid-2016, lagging an earlier turn in core PPI for intermediate
goods, which has risen from -4.2% annual growth in September
2015 to 1.5% in December 2016 (Exhibit 11, page 7). Similar
trends can be observed in PPIs internationally, most remarkably
To summarize, US consumer price inflation has been relatively
low for several decades, largely due to changes in the economy
and policymaking. This period of moderate inflation has been
characterized by declining prices in goods and rising prices in
services, primarily due to housing and health care.
Following the crisis, consumer price inflation fell, although
perhaps not as much as would have been expected given the
weakness of the US and global economy. More recently, inflation
has begun to rebound behind a strengthening economy. However,
Exhibit 9
PCE Health Care Inflation Lags CPI Medical Care Inflation
Y/Y Change (%)
6
CPI Medical Care Services
PCE Health Care
Difference
4
2
0
1996
2000
2004
2008
2012
2016
As of November 2016
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics
Exhibit 10
Wage Growth Showing Modest Acceleration
Average of Three Common Wage Measures
Y/Y Change (%)
4
Average
3
Adjusted Atlanta Federal Wage Tracker
Employment Cost Index
Average Hourly Earnings
2
1
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Average Hourly Earnings (AHE) and Atlanta Fed Wage Growth Tracker (Wage Tracker) as of 30 November 2016. Employment Cost Index (ECI) as of 30 September 2016.
AHE are for all employees. ECI is for wages and salaries of civilian workers excluding incentive-paid occupations. The ECI is a disaggregated quarterly series. The Wage Tracker is adjusted
downwards by 0.6 percentage points to reflect its historical spread with other wage measures.
Source: Bureau of Labor Statistics, Federal Reserve Bank of Atlanta, Goldman Sachs, Haver Analytics
7
reason for this, so any policy change in Washington, D.C. could
change the outlook substantially. In the Appendix, we display
a group of indicators that we constantly monitor to understand
inflation trends.
Exhibit 11
Core Producer Selling Prices Are Rising Again
Core PPI Intermediate Goods
Y/Y Change (%)
12
8
4
0
-4
-8
2004
2007
2010
2013
2016
Core PPI Finished Goods
Y/Y Change (%)
5
4
3
2
1
0
2004
2007
2010
2013
2016
As of December 2016
Source: Bureau of Labor Statistics, Haver Analytics
the sharp decline in energy prices in 2014, as well as a strong US
dollar, have been a drag and the effects have only recently faded.
In the coming months, headline measures of inflation could
increase rapidly, as the base effects of stabilizing energy prices add
momentum. We believe underlying core inflation will continue
to grind higher toward cycle highs in the 2%–3% range. One
area to pay special attention to is health care services inflation,
which has been increasing much more slowly than before the crisis
based on measures that include third-party payments. Medicare,
Medicaid, and the impact of other legislative changes are a major
Policy change more generally is a major source of potential
inflation. President Donald Trump campaigned on a protectionist
agenda. Raising tariffs or implementing a border adjustment
tax would raise the domestic price of goods and inputs that
presently are imported, depending in part on the reaction of the
US dollar and the amount of the tariff that gets passed through
to consumers via price increases. Similarly, the tax cuts currently
under discussion would add substantially to the federal budget
deficit. Their stimulative impact would depend on any changes to
spending and would have distributional consequences, but almost
certainly would add to cyclical inflationary pressures, eliciting a
reaction from the Fed.
Ultimately, we believe investors need to recognize that the balance
of risk has shifted from the potential of negative inflation to
the possibility that inflation could surprise to the upside. The
underlying cyclical trends in the US economy in particular are
leading to more inflation pressure on their own. Potential policy
changes such as increased infrastructure spending and/or fiscal
stimulus through tax cuts could add fuel to the fire. Structural
changes such as protectionist trade policies and/or immigration
restrictions could compound this risk and lead to a step change in
inflation rates.
In response to this paradigm shift in inflation risk, we believe
investors should also reassess their asset allocation to ensure that
they are protected from either persistent moderate inflation or the
possibility that inflation rates surprise to the upside. One lesson
of the history of US inflation is that the cause of inflationary
pressures can change and the asset price responses to inflation
will vary depending on the source of pricing pressures as well as
their severity and duration. Moreover, it is important to note that
investors have their own individual inflation rates depending on
their specific consumption of goods and services. As such, a careful
evaluation of the potential causes and responses to inflation is an
important consideration.
8
Appendix: Inflation Dashboard
We display four categories of the key indicators to undestand past inflation trends and gain forward-looking insights.
Recent Trends
Headline Inflation Rising with Energy Prices
Core Measures Higher and Stable
Y/Y Change (%)
Y/Y Change (%)
6
CPI-U All Items
PCE Price Index
Recession
3
Recession
4
2
2
1
0
CPI-U All Items
Core PCE Price Index
-2
0
2004
2007
2010
2013
2016
2004
2007
2010
2013
2016
As of December 2016
As of December 2016
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics
Shorter-Term Trends Reflect Stabilization for Headline Indices
Shorter-Term Trends Are More Volatile for Core Indices
M/M Change (% SAAR, 3mma)
M/M Change (% SAAR, 3mma)
12
4
Recession
Recession
6
3
0
2
-6
Core CPI-U All Items
Core PCE Price Index
1
CPI-U All Items
PCE Price Index
-12
0
2004
2007
2010
2013
2016
2004
2007
2010
2013
2016
As of December 2016
As of December 2016
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics
Market Expectations Rising from February 2016 Lows (CPI)
Consumer Expectations Have Yet to Rebound (CPI)
(%)
(%)
6
3
2
4
1
0
5-Year, 5-Year Forward Inflation
Expectation
10-Year Breakeven Inflation
5-Year Breakeven Inflation
-1
-2
2
Recession
Next year expected inflation rate
Next 5 years expected inflation rate
0
2004
2007
2010
2013
2016
2004
2007
2010
As of 24 January 2016
As of January 2016
Source: Federal Reserve Board, Haver Analytics
Source: Haver Analytics, University of Michigan
2013
2016
9
Major Components
Services Drive Inflation (CPI)
Services Drive Inflation (PCE)
Y/Y Change (%)
Y/Y Change (%)
6
Services less Energy & Food
Core CPI
Goods less Energy & Food
Recession
4
6
4
2
2
0
0
-2
Services less Energy & Food
Core CPE
Goods less Energy & Food
Recession
-2
2004
2007
2010
2013
2016
2004
2007
2010
2013
2016
As of December 2016
As of December 2016
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics
Housing Inflation Has Rebounded to Pre-Crisis Levels
Health Care Price Growth Down from Pre-Crisis, Especially PCE
Housing Share: CPI 33.7%; PCE 15.8%
Health Care Share: CPI 6.7%; PCE 17.1%
Y/Y Change (%)
Y/Y Change (%)
4
6
Recession
Recession
3
4
2
1
CPI Shelter
PCE Housing
2002–2007 Average
0
-1
2
CPI Medical Care Services
PCE Health Care
0
2004
2007
2010
2013
2016
2004
2007
2010
2013
2016
As of December 2016
As of December 2016
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics
Energy Prices Are Recovering
Food Prices In Decline
Energy Share: CPI 7.0%; PCE 3.9%
Food Share: CPI 13.7%; PCE 7.2%
Y/Y Change (%)
Y/Y Change (%)
40
PCE Energy
CPI Energy
Recession
20
8
CPI Food
PCE Food
Recession
6
4
0
2
-20
-40
0
2004
2007
2010
2013
2016
-2
2004
2007
2010
2013
2016
As of December 2016
As of December 2016
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics
10
Cyclical Pressures
Labor Market Is Tightening
Wage Growth Is Gradually Accelerating
(%)
Y/Y Change (%)
5
18
Recession
Atlanta Fed Wage Growth Tracker
Average Hourly Earnings
Employment Cost Index
4
12
3
6
0
2
2004
2007
2010
2013
2016
1
0
U6 Unemployment + Marginally Attached + Part-Time
for Economic Reasons Rate
U3 Unemployment Rate
CBO Estimate of Natural Rate of Unemployment
Recession
2004
2007
2010
2013
2016
As of December 2016
As of December 2016
Average hourly earnings is for production & nonsupervisory workers. Employment
Cost Index is wages & salaries for all civilian workers and is a disaggregated quarterly
series.
Source: Bureau of Labor Statistics, CBO, Haver Analytics
Source: Bureau of Labor Statistics, Federal Reserve Bank of Atlanta, Haver Analytics
Producer Prices
Domestic Producer Prices Are Rising
International Producer Prices Are Rising
Y/Y Change (%)
Y/Y Change (%)
15
Core PPI Finished Goods
Core PPI Intermediate Materials
10
10
5
0
0
-5
-10
-5
China
Japan
Euro Zone
5
Recession
2004
2007
2010
2013
2016
As of December 2016
-10
As of December 2016
Euro Zone: Domestic PPI for Industry excluding Construction & Energy. Japan:
Domestic CGPI excluding consumption tax & summer electric charges. China: PPI All
Industry Products.
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Haver Analytics
Source: Bank of Japan, China National Bureau of Statistics, Eurostat, Haver Analytics
Import Prices Are Rising…
… But the USD Is Strengthening Again
Y/Y Change (%)
Y/Y Change (%)
2004
2007
2010
2013
2016
20
20
Recession
Nominal Trade Weighted
Real Trade Weighted
Recession
10
10
0
0
-10
All Commodities
Nonpetroleum Imports
-20
-10
2004
2007
2010
2013
2016
2004
2007
2010
As of December 2016
As of December 2016
Source: Bureau of Labor Statistics, Haver Analytics
Source: Federal Reserve Board, Haver Analytics
2013
2016
11
This content represents the views of the author(s), and its conclusions may vary from those held elsewhere within Lazard Asset Management.
Lazard is committed to giving our investment professionals the autonomy to develop their own investment views, which are informed by a
robust exchange of ideas throughout the firm.
Notes
1 DeLong, J. Bradford.“America’s Peacetime Inflation: The 1970s”. Chapter in Romer, Christina D. and David H. Romer, eds., Reducing Inflation: Motivation and Strategy. 1997.
2 Forbes. “The Expense of Exclusive Living: The Forbes 400’s Cost of Living Extremely Well Index.” 25 October 2016.
3 Yellen, Janet L. “Macroeconomic Research after the Crisis”. 14 October 2016. Preceding paragraph also follows Yellen’s narrative.
4 Ball, Laurence et al. “What Else Can Central Banks Do?”. Geneva Reports on the World Economy 18. 2 September 2016.
5 Federal Reserve Bank of Cleveland.“PCE and CPI Inflation: What’s the Difference?”. 17 April 2014.
6 Bureau of Labor Statistics Working Paper.“New Evidence on Outlet Substitution Effects in Consumer Price Index Data”. November 2008.
7 Clemens, Jeffrey et al. “Medicare Payment Cuts Continue to Restrain Inflation”. Federal Reserve Bank of San Francisco Economic Letter. 9 May 2016.
8 Pandl, Zach and Daan Struyven. “Health Care Inflation: Get a Second Opinion”. 13 September 2016.
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