Feature
Page 8 of 17
What’s Up with U.S. Core
Inflation Being Down?
Michael Gregory, CFA, Deputy Chief Economist • [email protected] • 416-359-4747
The ebbing of U.S. core CPI inflation has been stark since the start
of the year. In January, the annual change matched its highest level
in more than eight years at 2.3% y/y, but it fell to 1.7% by May
(Chart 1). Apart from recessions, or within a year after them when
disinflationary pressure can linger, this is the largest four-month fall
in core inflation since the mid-1970s (five recessions ago). With the
U.S. economy flirting with full employment and the annual change
in real GDP (2.0% y/y in 2017 Q1) running slightly above its
longer-run speed limit (1.8% according to the median FOMC
projection), something strange is happening in CPI-land.
The Bureau of Labor Statistics (BLS) publishes data that allow us to
calculate the contribution of core CPI constituents to the 12-month
change in the total core CPI (for 174 categories and sub-categories).
We determine the individual contributions both in January and May,
and rank the four-month changes. When a specific category and its
sub-categories are clustered, we choose the most disaggregated item
within the cluster. Our goal is to explain the 0.6% drop (actually 54
bps when working with unrounded data) in the most detailed fashion
possible. The results are shown in Table 1 (next page), with eight
items (worth a bit more than half of the core CPI) accounting for all
of the recent deceleration in core inflation. With inflation on both the
core goods and core services fronts cooling comparably (Chart 2),
there is mix of both goods and services in the results.
The Details
The cost of cellphone service plans has fallen more than 12% in the
past year, contributing -28 bps to the current annual change in total
core inflation and accounting for one-third of its recent deceleration.
Technological advances and intense competition have ensured
cellphone service customers are regularly getting “more for their
money”, equivalent to having persistent price cuts for an unaltered
service plan (Chart 3). However, in March, there was a record
monthly price drop (which caused a rare monthly decline in the core
CPI) as competitive forces led the major market participants to
adopt unlimited data. Note that this impact on the annual change in
the core CPI will persist until next March.
The 12-month change in owners’ equivalent rent (OER) didn’t slip
as drastically, but weighing in at around 31% of the core CPI, it
carries a much bigger punch. OER is an unobserved, imputed price
designed to capture how much it would cost homeowners to rent the
houses they live in (in a valiant attempt to measure the cost of
Focus — June 23, 2017
Chart 1
Core Inflation Falls
United States
(y/y % chng)
Core CPI
15
10
5
0
58
68
78
88
98
08
Shading marks periods of U.S. recession
Sources: BMO Economics, Haver Analytics
Chart 2
Falling on Both Fronts
United States
(y/y % chng)
Core CPI
4
3
Services
2
Goods
1
0
-1
07
09
11
13
15
17
Sources: BMO Economics, Haver Analytics
Chart 3
Dialing Down, Cycling Down
United States
(y/y % chng)
CPI Components
5
6
5
0
Medical
Care
4
-5
Cellphone
Services
3
-10
2
-15
1
07
12
17
07
Sources: BMO Economics, Haver Analytics
12
17