Consumer Price Dynamics Remain Problematic | Flexible CPI

Sticky vs Flexible CPI

Brian Ransom, CFA ®, MBA, MS

Research Director

If you’re a frequent reader of our material here at SWMG, then you know we like to follow Sticky vs Flexible CPI. While inflation headlines can tell you a lot about consumer prices over the last year, the devil is usually in the details. As an example, gas prices, used cars, apparel, and food prices can fall almost as fast as they rise. Home furnishing, insurance, education prices, and rent, however, rarely if ever fall in price. In other words, their prices are “sticky.”

Flexible prices, because of their volatile nature, are very poor predictors of near-term inflation. Sticky prices, however, are much better at predicting the future direction of that headline CPI number (Bryan, Meyer Economic Commentary). Alarmingly, Sticky CPI has been increasing at a fast pace. Below, Flexible CPI is the large spike in grey/green. Yes, that large spike is big but Flexible CPI, as mentioned before, is volatile and often temporary. It’s the smaller orange growth in Sticky CPI that’s concerning because the change in Sticky prices reflect the ongoing inflationary nature of the economy. The slope of that curve does not reverse often and significant reversals (red arrows) typically only occur after a recession (grey bars).

At this point, until that orange line reverses, the ongoing assumption should be that inflation continues.

Sources:

Bryan, Michael & Meyer, Brent. “Are Some Prices in the CPI More Forward Looking than Others? We Think So.” Economic Commentary. Number 2010-2. May 19, 2010. Federal Reserve Bank of Atlanta.
Federal Reserve Bank of Atlanta. “Sticky-Price CPI.” Last Updated June 10, 2022.

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