Two Flavors Of Inflation


Does the recent pickup in inflation make you nervous? Read the two scenarios below before answering.

• In April, the inflation rate rose to 1.1%, versus the slight deflation seen in the same month a year earlier. On a year-over-year basis, inflation has accelerated sharply this year. The current inflation rate is more than double the average over the last 12 months. On a month-to-month basis, prices have declined in three of the last eight months.

• Over the last year, prices rose 2.1%, up from 1.8% in the same period a year earlier. Inflation has risen gradually over the last year and remains just 0.1% above the average of the last 12 months, which is also the 20-year average. On a sequential-month basis, prices have risen between 0.1% and 0.3% in 36 consecutive months.

Some of you probably sweated more about the first scenario, with inflation jumping yet the threat of deflation close to the surface. Others may have worried about the higher inflation in the second scenario. In fact, both scenarios are true, and neither reveals especially dangerous trends.

The first scenario reflects the headline Consumer Price Index. The second considers core CPI, which excludes food and energy. Core inflation remains under control, not far above averages for the last one, three, five, 10, and 20 years — or the Federal Reserve's 2% target.

Like many analysts, we usually prefer to focus on core inflation, because the volatility of food and energy prices tends to smooth out over time. Over the last 10 years, both inflation rates averaged 1.9%. And over the last 50 years, nominal inflation averaged 4.2%, with core inflation 4.1%.

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