HomeNewsWhat’s Really Causing Inflation? On Shelter, Energy, and Food
What’s Really Causing Inflation? On Shelter, Energy, and Food

What’s Really Causing Inflation? On Shelter, Energy, and Food

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Food, energy, and shelter make up the majority of the consumer price index (CPI), 54% to be exact. People notice fluctuations in grocery and gas prices because they are in contact with groceries and gas almost every day. In fact, gas prices comprise only a small portion of the household budget.

Tom Porcelli, chief US economist at RBC Capital Markets, told CNBC in an interview:

You have to spend money on shelter, you have to spend money on food, and most of us have to spend money on energy. [Inflation] represents a meaningful challenge for consumer spending.

The concept of core inflation

The biggest component of inflation is referred to as “services less energy services” by the Bureau of Labor Statistics. These include shelter, but also less prominent items such as car rental, vet bills, and lawn care services. Those three have increased by more than 5% y/y and amount to 57% of CPI in total.

Commodities minus food and energy commodities are the next biggest category. It includes clothes, appliances, and household supplies. This group is up 8.5% y/y and makes up just over a fifth of the index.

Energy has the smallest CPI weighting

Energy prices might get all the headlines, but energy commodities and services actually have the smallest weightings on the CPI. Commodities like propane and oil make up less than 5%, while piped gas, electricity, and other energy services account for just 3.4% of the CPI. What grabbed headlines was the fact that those two categories climbed 50.3% resp. 16.2% this year.

The share of food

Food at and away from home are the other leading groups. These increased by around 12% resp. 7.4% y/y. The Fed’s economists and others remove food and energy costs to estimate “core” inflation, which gained 6% y/y in May. Headline inflation was up 8.6%.

Fed Chair Jerome Powell recognizes that focusing on the core of inflation is important. After the recent meeting, he commented at a news conference:

Core inflation is something we think about because it is a better predictor of future inflation, but headline inflation is what people experience. They don’t know what core is. Why would they?

While the Fed’s rate hikes are aimed at controlling inflation, they have not been effective so far.