Has Inflation Peaked? Here's What You Need to Know to Under

News

You’ve probably seen last week’s big headline:

U.S. inflation has finally slowed for the first time in 9 months.

This has led some news outlets to say that inflation finally reached its peak in March and is now cooling off.

But is that true for, you know, normal people?

Will we now be paying less for food, gas, housing etc.?

The short answer is, most likely, no. At least that’s not what the latest CPI number shows.

In this article, we’ll explain:

  • What the CPI is and how it works.
  • What last week’s CPI numbers really tell us about inflation.

What is the CPI, exactly?

The Consumer Price Index (CPI) is the most widely used measure of inflation. It tracks the change in the prices of services and goods we buy everyday.

To be more accurate, the CPI groups those goods and services together in categories or “baskets:” one basket for clothing, one for housing, and so on.

The U.S. Bureau of Labor Statistics (BLS) has classified all items into eight major groups:

  • Food and beverages
  • Housing
  • Clothing
  • Transportation
  • Medical care
  • Recreation
  • Education and communication
  • Other goods and services

Nevertheless, not all of these categories are equally important when calculating the CPI.

They are ranked according to what statisticians believed were their relative importance in the household in a certain time period, with some having more weight than others.

Here’s how different CPI categories are ranked today (here divided into 7 main groups):

As you can see, housing, food, commodities (including medication and cars), and energy are the highest weighted categories within the CPI calculation.

This means that these categories will have the biggest impact on how inflation rate is measured. Roughly speaking, if one or several of these categories go down, the overall CPI will be lower.

For example, if housing prices start decreasing, the CPI may indicate inflation is going down, even though food and commodities prices might be going up at the same time.

That’s why, if you hear that high inflation has slowed down, it does not necessarily mean that you will spend less money in your day-to-day life.

And CPI works more or less in the same way in Europe.

Here is a breakdown of the consumer price index for the Euro area in March 2022:

In Europe as well, housing & energy (including gas prices), transport, and food are the three main categories composing the index.

What does April’s CPI tell us about inflation?

The short answer to this question is that inflation keeps running hot.

Even though April’s reading showed a slight decline from the 8.5% increase seen a month before, inflation is still on the rise and remains at its highest level in 40 years.

Why? Because prices in the biggest CPI categories, including food and shelter, haven’t stopped rising:

  • Food prices jumped 0.9%, showing the 17th consecutive monthly increase.
  • Shelter costs went up 0.5%, in line with the last 6 months.
  • Transportation services increased 3%, the biggest jump for the category since last year.
  • Airfare costs spiked 18.6% as biggest airlines reported an increase in demand for travels going into the summer.
  • Finally, the price of new cars jumped 1%.

These numbers tell quite a different story than those you see in the press, right?