TheEconomistNovember6th 2021
Graphic detail Inflation80
The used-car conundrum
C
onsumer-priceinflation has risen to
5.4% in America, the highest in 30
years. On November 3rd the Federal Re
serve said it would taper bond purchases, a
step towards higher interest rates. Most
economists say that this bout of inflation
is a result of temporary disruptions caused
by covid19, and that it will pass. But some
think it presages a longerterm trend.
A leading argument by inflation doves
has been that just a few items have caused
a large share of total price increases. In the
quarter to August used cars, hotel rooms
and airfares made up less than 5% of Amer
ica’s consumerprice index, but together
accounted for the majority of overall infla
tion. “This is really extreme,” Paul Krug
man, an economist, wrote at the time, “and
does suggest transitory bottlenecks rather
than broadbased inflation pressure.”
This case rests on two claims, which
both merit scrutiny. One clearly stands up:
when compared with past periods withsimilar inflation, current price rises are in
deed unusually concentrated. The other—
that inflation is likely to slow down as a re
sult—is also broadly true. However, this ef
fect is too small for the Fed to breathe easy.
To test these hypotheses, we built a da
taset of price levels since 1959 for every
item—from housing to lottery tickets—in
the personal consumption expenditures
(pce) index, one of the Fed’s preferred met
rics. For each rolling 12month period, we
calculated a measure of how much price
changes vary between items: their stan
dard deviation. When a few components
account for a large share of inflation, this
number is high. When most items’ prices
change by similar amounts, it is low.
In general, standard deviations are cor
related with inflation: the higher the aver
age increase in prices, the more specific
items’ price changes differ from each oth
er. However, some eras were unusual, with
inflation that was either low but concentrated, or high but broad. To identify such
outliers, we measured the “excess” con
centration of inflation in each time period:
the gap between the actual standard devi
ation of price changes and what you would
expect based on overall inflation.
This measure is now abnormally high.
During the year to May inflation was more
excessively concentrated than in 97% of
rolling 12month periods since 1961. It has
dipped slightly as usedcar prices have lev
elled off, but still sits in the 89th percentile.
What does this mean for future infla
tion? Historically, when excess concentra
tion has been high, the present has been a
poor guide to the future. When inflation is
above its tenyear average, as it is now, high
excess concentration makes it more likely
to fall. This pattern should lead forecasters
to reduce their predictions for inflation.
The notion that a few big price changes
can lead forecasters astray is hardly new. In
the 1970s economists devised “core” infla
tion, which excludes food and energy.
More recently, “trimmedmean” measures,
which drop the items whose prices have
swung the most, have come into vogue.
The Dallas Fed has published papers show
ing that its version, which excludes the
bottom 24% and top 31% of the pceindex,
predicts inflation better than core does.
However, both of these methods haveA handful of items are driving inflation in America. Our new measure shows that
this portends lower inflation—but not enough for the Fed to drop its guard-2004020608010025 50 75 100Spectatorsports-5%Packagetours-2%Car rental +110%Petrol +55%
Used cars +52%Housing+2%Diningout+5%
Doctors’bills+4%Inflation in America* by item, % change on a year earlier→ Concentrated inflation
Year to May 2021
Inflation 4.3%↓ Broad-based inflation
Year to April 1969
Inflation 4.4%↓ Typical distribution
Year to April 19 4
Inflation 4.4%Percentile of price changeCar insurance +57%Eggs +22%Year to May 202Personal computers -1%