Core inflation down? It's really just a blip.
Despite all the attention about core inflation's decline, it's actually up excluding 'equivalent rent.'
Many analysts, and also Wall Street which escaped the sell-off that the Fed's discount rate increase otherwise would have caused, made a big deal out of the small drop in so-called "core inflation" in America in January. However, that was likely a blip caused by temporary factors.Skip to next paragraph
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However, what few have noticed is that this is entirely the result of a big drop in the rate of increase in rents and "owner's equivalent rents". Indeed, excluding this factor, "core inflation" has risen significantly.
Rents are about 7.5% of the "core" index, while "equivalent rent" is 32.5%. In the year to January 2009, rents increased 3.4% and "equivalent rents" increased 2.2%. In the year to January 2010, these increases had dropped to 0.5% and 0.4% respectively. Excluding these factors, "core inflation" was 1.2% in the year to January 2009 and 2.35% in the year to January 2010.
One example of this was apparel prices, which decreased 0.9% in the year to January 2009 but increased 1.7% in the year to January 2010.
Now, I really don't believe in the "core inflation" concept, so I wouldn't make much of this increase in what one might call "core core inflation". I do however consider the increase in all-items inflation from 0.0% in January 2009 to 2.6% in January 2010 to be of interest. The point is instead that particularly given how rents and "equivalent rent" is affected by relative preference for owned housing relative to rented housing and given how they have such a big influence on the "core" index, one shouldn't make much of the movements in "core inflation".
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