1. The Main Ways That We Measure Price Inflation
2. Core-CPI Has Been Below 2% For the Last 8 Years
3. Reasons Why Inflation Could Move Higher in 2018
4. Is 2018 the Year That US Inflation Takes Off?
5. What the US Dollar & Gold Are Signaling for Inflation

Overview

As you know, a lot of predictions are made this time of year – about the economy, the markets, interest rates, inflation, etc. Some forecasters are predicting that 2018 will finally be the year when inflation takes off and returns to higher levels. However, some of these same prognosticators have been saying the same thing for the last several years.

The fact is that the US rate of inflation, as measured by the Consumer Price Index, has been declining over the last 25 years. Most prices are moving higher, just not as fast. So, what’s to make us believe we’ll see a big jump in inflation in 2018? I’ll give you the arguments for and against as we go along today.

The Main Ways That We Measure Price Inflation

The most common measure of US inflation is the Consumer Price Index or CPI, which is prepared by the US Bureau of Labor Statistics (Labor Department) and reported monthly. Another popular inflation gauge is the Personal Consumption Expenditures Index or PCE, which is prepared by the US Bureau of Economic Analysis (Commerce Department) and happens to be the Fed’s favorite measure of inflation.

Both Indexes measure changes in the price level of a basket of goods and services commonly purchased by households. The goods and services in the two baskets differ somewhat, as do their weightings of the various items measured.

Within both Indexes, there are various sub-indexes. The most widely-followed sub-indexes are the Core-CPI and Core-PCE. The term “core” simply means that items related to food and energy have been removed because they tend to be highly volatile. The Fed uses Core-PCE as its primary inflation indicator. Most economists I read use the Core-CPI sub-index.

Core CPI

Core-CPI Has Been Below 2% For the Last 8 Years

With that brief introduction out of the way, we can return to our main question for today, which is whether inflation is poised to move significantly higher this year. As you can see in the chart above, core-CPI has been trending lower since the early 1990s and has not been above 3% in over two decades.

Let’s look at the latest inflation numbers which are for November. The broad CPI (including food and energy) rose 2.2% for the 12 months ended November. Core-CPI rose 1.7% over the same 12 months. The broad PCE rose 1.8% for the 12 months ended November, while the core-PCE rose 1.5%.

And here’s perhaps the most interesting statistic I ran across in preparing this article. Core-CPI has risen at an average rate of just 1.76% since 2009. That’s eight years of sub-2% growth in consumer prices (excluding food and energy) on average. The question is, why have price increases been so modest since we came out of the recession?