Where Is Inflation Heading? Yearly Changes May Be Deceiving

When the Bureau of Labor Statistics releases the Consumer Price Index, they report both the monthly change in prices and the year-over-year change. Both have been useful in looking at the direction of inflation – monthly changes are more recent, but it can also be volatile, however year-over-year inflation may be misleading for trying to figure out the direction of inflation over the next few months.

This reflects that last summer, we got some relatively low reads on monthly inflation. Unfortunately, the monthly inflation numbers did not stay that low and went back up in the following months. However, those low monthly reads remained in the year-over-year numbers and have influenced how high year-over-year inflation has been. 

However, as we head into the summer, those low reads from last summer will pass out of the year-over-year calculations, mechanically raising the year-over-year numbers for inflation even if the summer’s monthly numbers come in at target. For instance, the graph below shows what would happen to year-over-year headline CPI over 2024 assuming no further acceleration in monthly inflation (i.e. headline monthly inflation is the same as it was in April).

Similarly, this graph shows what would happen if core CPI growth remains the same as in April.

In other words, year-over-year inflation could look worse moving forward, even if inflation is not actually picking up on a monthly basis.

For figuring out the direction of inflation moving forward, monthly (or 3-month, which will help smooth out volatility) changes in inflation are a better indicator, as year-over-year numbers may be misleading.