Cracking The Inflation Code

Imagine if someone asked you how hot it was in America last month. How would you respond to such a vague question? As everyone knows, temperatures vary greatly depending on a number of factors, from region to elevation, from time of year to even time of day.

Is the person inquiring about the temperature in Flagstaff, Arizona, in the early morning of Wednesday, May 3—or in Fargo, North Dakota, in the late evening of Sunday, May 28? Are they looking for an answer in Fahrenheit or Celsius?

Most people would agree that the “temperature in America last month” question is absurd, but this is more or less what we get with regard to inflation. Once a month, the Bureau of Labor Statistics (BLS) releases its headline consumer price index (CPI), which is supposed to give us some idea of how much or how little consumer prices changed compared to last month and last year.

This week’s CPI, for example, shows that prices in May continued to increase year-over-year, but at a much slower pace of 4%, down from nearly 9% in June of last year.

This makes it seem as if the Federal Reserve’s efforts to bring down inflation by hiking rates are working, but if we strip out volatile food and energy prices, the picture isn’t as rosy. The so-called core CPI—which measures everything except food and energy—shows that prices on average barely budged from May 2022 to May 2023.

core inflation rate hikes

I should add that the BLS has continued to revise its methodology over the years. If we still used the 1980s methodology, annual inflation would be closer to 12% than 4%.