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The CPI is dominated by so-called sticky prices that don’t change very often.

The best predictor of this month’s inflation rate is last month’s inflation. Yet the inflation rate from a year ago has little bearing on what the inflation rate will be going forward. It gives equal weight to inflation in September 2021 and inflation in September 2022. The year-on-year perspective is good for seeing how far we’ve come, but it’s not so good at predicting where inflation is going, because it’s essentially a backward-looking measure. If we looked just at the year-on-year increase in the CPI, we might agree with the Federal Reserve’s assessment that there hasn’t been an “appreciable decline” in bringing inflation down to the 2% target. This method answers the question: How far have we come? This may be the most common way the CPI is reported in the media right now, because it puts the intensity and persistence of inflation into a perspective that readers can relate to. (The same logic in this column applies to the Fed’s preferred measure, the personal consumption expenditure price index.) We would compare current prices with prices a year earlier.

What’s inflation done over the longer run?įor instance, if we want to know how much inflation we’ve already endured, it might be best to look at the year-on-year increase in the CPI. There are several correct ways of displaying the data, but some are better than others at answering specific questions. Making sense of economic data is often a matter of finding the right context, which means the first thing you should do is ask yourself how you want to make use of the data. “ The Fed has actually hit its 2% target over the past three months, but of course the Fed is concerned that inflation could accelerate from here, especially in the hugely important shelter category, where hot inflation for the next year or so is baked into the cake.

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