Used cars, hotel rooms and airfares have pushed inflation up. But the current episode of “concentrated” inflation differs from previous periods of rising prices
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 America’s consumer-price index, but together accounted for the majority of overall inflation. “This is really extreme,” Paul Krugman, an economist, wrote at the time, “and does suggest transitory bottlenecks rather than broad-based inflation pressure.
In general, standard deviations are correlated with inflation: the higher the average increase in prices, the more specific items’ price changes differ from each other. 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” concentration of inflation in each time period: the gap between the actual standard deviation of price changes and what you would expect based on overall inflation.
The notion that a few big price changes can lead forecasters astray is hardly new. In the 1970s economists devised “core” inflation, which excludes food and energy. More recently, “trimmed-mean” measures, which drop the items whose prices have swung the most, have come into vogue. The Dallas Fed has published papers showing that its version, which excludes the bottom 24% and top 31% of theHowever, both of these methods have flaws.
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