U.S. consumers are under the impression that inflation is actually much worse than it is, according to Citi’s Robert DiClemente.
DiClemente points to the fact that prices are rising sharply, but for only 30% of the consumer price index basket. Unfortunately, that happens to be the part of their basket consumers buy regularly, so it’s having a large psychological impact.
From Robert DiClemente:
Nonetheless, popular perceptions have been skewed by the fact that consumers buy food and energy so often. It seems prices of goods and services that consumers buy every month have been skyrocketing. At the same time, prices of other items consumers buy sporadically but are nonetheless important parts of the basket, including big-ticket purchases like cars and computers, have been relatively tame. The same can be said for items purchased on fixed contracts, such as auto leases, rents, and insurance.
Following research by Statistics Canada, we segmented the US CPI by the frequency of purchases and found that the entire swing up in measured inflation has occurred in the 30% of the CPI that consumers buy regularly. Together, prices of these items have increased by about 7% in the past year, while prices of the rest have risen by 1.4% (Figure 1). Importantly, the frequently purchased price index bears little resemblance to the path of underlying inflation. Price swings of these items are extremely volatile and often give misleading signals of the trend in inflation.
While consumers may be feeling the pinch of inflation right now, it could disappear quickly, particularly as fuel costs fall.
Note how the cost of frequent purchases is rising sharply, and infrequent and contracting slowly. Also, note the long-term volatility for frequent purchases prices, even in periods of growth.