Only some of today’s inflation is expected to stick around. Here are 5 key categories where prices are likely to stay higher for longer
There are a lot of ways to measure inflation in the U.S., and economists continue to debate which gauge is the best.
Many Americans will have heard of the consumer price index (CPI), which keeps track of price changes in a basket of goods and services commonly used by U.S. consumers. But there’s also the personal consumption expenditures (PCE) price index, which is preferred by the Federal Reserve and investment banks for economic analyses.
And then there are measures of inflation that are more under-the-radar, like the Atlanta Federal Reserve bank’s sticky-price CPI.
The sticky-price index measures inflation in goods and services where prices tend to change more slowly; meaning once a price hike comes, it’s likely to stick around.
In June, the sticky-price index hit a 31-year-high, rising at a 5.4% annual rate. That has some economists worried that inflation will be more difficult to combat than the Federal Reserve would like to admit.
“Inflation is becoming entrenched,” Bill Adams, Comerica Bank’s chief economist, told Fortune. “This is exactly what investors and central bankers worry about the most.”
What makes a price sticky?
For years, economists have been attempting to find a way to accurately measure inflation, but it’s easier said than done.
Measuring price changes across the economy in real-time is nearly impossible, so economists have taken to using lagging gauges that measure price increases and decreases that have already happened.
The problem is that different categories of goods and services experience price changes at different rates. If these rates aren’t taken into account, it can give a false sense of the reality of the inflationary pressures in the economy.
For example, the Fed can misjudge the staying power of inflation if price increases in sticky, critical categories like rent are considered to be equally short-lived as “flexible” price categories like energy.
The Atlanta Fed’s sticky-price index is meant to fix this issue. It measures price changes in goods and services where it can be a challenge for business owners to adjust prices, because it is more likely to affect people’s willingness to buy something.
“The prevailing belief is that, in some markets, changing prices can involve significant costs. These costs can greatly reduce the incentive of firms to change prices,” officials from the Cleveland Federal Reserve Bank officials wrote in a 2010 research report.
The Atlanta Fed calls a CPI component “sticky” if the price changes less often, on average, than every 4.3 months. Roughly 70% of the consumer price index is made up of sticky price categories, while 30% is considered to be made up of “flexible” price categories.