The Latest Inflation Report, Explained | Diving In

Justin Wolfers (0:00)

The latest inflation report just dropped. It's the last inflation report before the election. It comes also at an important moment. In our economic cycle, is inflation finally coming down, or is it persisting at the current high rates? And this one's a doozy. Look, let me start with a headline. I'm bringing you mostly bad news today. Inflation is worse than we thought, it's higher than it ought to be, and no one's going to be happy about this. This is data telling you about your reality. In fact, it's telling you about your last month. You already experienced these prices, so at some level, maybe some of this just isn't so surprising to you. I'm Justin Wolfers, this is Platypus Economics, and I'm here to dig into today's big inflation numbers so you can make sense of what this report says and what it says about the forces shaping your life.

Okay, let's start at the beginning, and the beginning is what was inflation over the past year. It came in at an eye-popping 3.7%.

Remember, the Fed's goal is generally to keep inflation round about 2%.

It doesn't actually spend all its time focusing on this measure, but this measure tells you a lot about what's going on. So we're well above the Fed's target. There's three ways to think about this. You could think about this as, how is inflation in absolute terms? And the answer is too high. The second way is to think about what's going on with the trend, and at a minimum, we're confident headline inflation is not trending down. It may be starting to turn up. A lot of this is about energy prices. We'll get into that in a moment. So maybe it's just sort of stuck at that troublingly high level. Another way to look at this is, how is this relative to market expectations? What the wonks on Wall Street expect ahead of this was inflation to be a little bit lower, maybe 3.6. Some people even thought 3.5%.

So the big news today is inflation, not just that inflation is high, I think we all know that, but inflation is higher than we had expected. So the news here is bad. You should adjust your story, your understanding of the economy to take account of that. The thing that economists really focus on within this is not what's happened over the last 12 months, because 11 of those 12 months, we already knew a lot about. So the big news today is what happened in the latest month. And the latest month shows that inflation rose by 0.6 percentage points in just one month.

If it continued at that rate, which hopefully it won't, then overall annual inflation would start to be very, very troubling. But I think the more troubling thing here is there really is no sign of inflation abating or good news. Let me pause on this. If you want to know what's happened to the cost of living, this measure called headline inflation measures the cost of living. There's going to be all sorts of talking heads on TV, telling you about this price rose by a lot, if they want you to believe it's worse news or this other price didn't rise by very much. And whenever you see people doing that, it's almost always that they're trying to bend the data, cherry pick the data to tell a particular story that fits their political moment. So that's why I like to pause on this top line number. I think it's the most important thing. I am going to show you or talk about some specific details, but it's not because I want you to believe the number is higher or lower than what it is. It's because I want you to understand what's going on under the surface. Okay, that tells us what's going on with the cost of living, but economists tend to focus a lot on what we call core inflation. It's basically take the cost of living and we measure it by saying, well, there's a basket of goods and services that people buy. How much more expensive is that basket than it was a year ago? The answer is 3.7%.

There are some things in that basket, in particular food and energy, which are prices that are just incredibly volatile. Food, for instance, there might be a drought or a bumper harvest, and that bumps around those prices. Oil, as you can probably tell right now, might move around and energy might move around a lot because of geopolitical tensions. And so the idea of core inflation is not to say those things don't matter, but that those things don't reflect the broader inflationary movement or momentum within the US economy. And so that's why we turn to core inflation. Now, remember, core inflation takes out food and energy, and energy's been one of the most important stories for the American economy since the invasion of Iran. When we focus on core inflation, it looks like this measure is stuck at this frustratingly high level of 2 something percent, at somewhere above 2.5 percent. The precise number is 2.6 percent. But it's, you know, the good news is it's below 3, and the bad news is we can't get it below 2.5. This, again, was another case where the number came in hotter than Wall Street and other economists had expected. So their view, therefore, is that there's more underlying inflationary momentum in the economy a bit more than we might have otherwise anticipated. In the latest month showed, this month, core inflation rose by one third of a percentage point. That rounds down to 0.3 in all the newspaper reports that you're going to see. And the thing to notice about that is that is worryingly high. If we had a few more months like that, then core inflation would definitely be above 3%.