Bringing Prices Down Is Hard
Inflation, as measured by the CPI, is now running at a still-high annual rate of 7.70% (as of October 2022).3 Ultimately, the Fed’s goal is to drive inflation down to around 2%. But history suggests this won’t be easy, and part of the reason has to do with what economists call “sticky” inflation—the kind that tends to stay high even as certain commodity prices (e.g., oil, grain, lumber, etc.) seem to fluctuate. Long after supply-chain constraints or temporary fuel shortages cease to be primary drivers of inflation, sticky inflation—sometimes called structural inflation—is likely to keep other costs for labor, rents, service providers, and some durable goods at relatively elevated levels.
To strip out the statistical “noise” that volatile prices create, most economists prefer to focus on core inflation, separating out food and energy prices from the less volatile categories. In October 2022, core inflation was running at an annual rate of 5.3% (compared with 7.7% overall annual inflation).4
Flexible vs. Sticky Inflation
While core inflation provides one way to strip out price volatility, another useful framework, developed by economists at the Federal Reserve Bank of Atlanta, uses a strategy in which the published CPI spending components are broken down and divided into two distinct buckets: “flexible” items that change prices at least every 4.3 months and “sticky” item categories whose prices change less often. Looked at in this way, it’s clear that prices of the sticky variety have been inexorably climbing since June 2021 while flexible prices (including motor fuels) were bouncing up and down before sharply declining after June 2022 (FIGURE 1).5