Comprehending the Recent Trends in Inflation Dynamics


Over the past two years, inflation has remained consistently elevated, surpassing the Federal Reserve’s annual target of 2%. This high inflationary trend has been pervasive, affecting various sectors of the economy. It can be attributed to a combination of supply and demand factors closely linked to the ongoing COVID-19 pandemic, as well as the fiscal and monetary policies implemented in response to mitigate its impact.

Aggregate Prices and Inflation Dynamics

Inflation refers to the fluctuation in the overall price level over a specific timeframe. The Federal Reserve utilizes the personal consumption expenditures (PCE) price index, published by the Bureau of Economic Analysis, as its preferred measure of the price level. This index reflects the average prices of goods and services consumed within the gross domestic output.


The graph illustrates the monthly progression of the PCE price index from January 2016 to the most recent available data in March 2023. It also includes two alternative measures: an index excluding energy prices and another excluding both food and energy prices (commonly known as the core PCE). Energy prices, heavily influenced by internationally traded commodities like oil and gas, are subject to global factors, making them highly volatile. Although energy prices constitute a relatively small component (approximately 4%) of consumption expenditures, their volatility can distort the overall price level and potentially mislead observations on general price movements.

Similarly, food prices (constituting about 8% of total consumption expenditures) are excluded to create the core price index, which is often referenced alongside the “headline” index encompassing all goods and services. However, it is worth noting that in recent times, food prices have shown less volatility, aligning more closely with other prices during the pandemic. Consequently, an index that solely excludes energy prices may provide a clearer insight into underlying domestic factors impacting price dynamics.

Pre-COVID-19, inflation exhibited an average annual growth rate of 1.8%, slightly below the Federal Reserve’s 2% target. This inflationary trend was disrupted at the onset of the pandemic and resumed towards the end of 2020 but at a significantly accelerated pace. Analyzing the impact of energy prices during this period reveals their importance, as the fluctuations in inflation were less pronounced when excluding them. Both the index excluding energy and food, as well as the index excluding energy alone, demonstrated a more consistent and stable increase.

12-month change in personal consumption expenditures price index (PCE Index)

The above graph showcases the inflation rates, represented by the 12-month change in the respective price indexes. Across all three considered indexes, annual inflation consistently exceeded 2% starting from March 2021. Energy prices played a prominent role in driving inflation dynamics, but even when excluding energy prices, inflation remained notably high. Throughout 2022, inflation stayed above 5% annually, and as of March 2023, it remained slightly below 5%. When focusing on the core PCE index, which excludes both food and energy, there is a moderate moderation in inflation compared to its peak, but the decline is not as pronounced as observed in headline inflation.

The initial table presents a concise overview of inflation rates during specific periods of interest. The first period, spanning from 2016 to 2019, corresponds to the years immediately preceding the pandemic when inflation remained near the Federal Reserve’s 2% target. Subsequently, the table includes data for the years 2020, 2021, and 2022. Lastly, the “COVID-19” period encompasses the entire duration of the pandemic, ranging from March 2020 to March 2023. To facilitate comparability across periods of varying lengths, all inflation rates are annualized.

All Goods and ServicesExcluding EnergyExcluding Food and Energy (Core)
2016-19SOURCES: Bureau of Economic Analysis, Haver Analytics, and author’s calculations.1.7%1.8%

The provided table draws attention to the notable acceleration of inflation in the years 2021 and 2022. Taking into account the entire span of the COVID-19 pandemic, the aggregate price level has increased at an average annual rate of 4.3%. However, when excluding energy prices, this rate moderates slightly to 4.1% annually. Furthermore, when both food and energy prices are excluded, the annual inflation rate further reduces to 3.9%.

Comparing these figures to the pre-pandemic period, inflation rates during the COVID-19 period exceed those observed earlier by 2.1 to 2.5 percentage points. It is worth noting that these rates significantly surpass the Federal Reserve’s targeted inflation rate of 2%. The sustained elevation of inflation levels highlights the impact of the pandemic and associated factors on the overall price level.

Examining the Components of Inflation

The subsequent table dissects inflation, excluding energy, into four significant categories: food, core goods, core services excluding housing, and housing. These components correspond roughly to 8%, 22%, 50%, and 16% of total consumption expenditures, respectively. It’s important to note that the remaining 4% accounts for expenditures on energy goods and services. By examining the contribution of these categories, we can gain insights into the different factors influencing inflationary trends.

Annualized PCE Inflation Rates by Category

FoodCore GoodsCore Services Excluding HousingHousing

The behavior of various inflation components exhibited significant differences during the pre-pandemic period. Food prices remained relatively stable with minimal inflation, while core goods prices actually declined, primarily driven by durable goods. On the other hand, core services excluding housing and housing experienced inflation rates surpassing the Federal Reserve’s target rate. However, the onset of the pandemic brought about notable changes to these trends.

Since 2021, all components have demonstrated inflation rates higher than 2% annually. Among these components, food experienced the swiftest inflation rate, averaging 6.6% annually, followed by housing at 4.8% annually. Fed Chair Jerome Powell has highlighted the category of “core services excluding housing” as particularly crucial for comprehending inflation dynamics. Inflation within this category closely aligns with the behavior observed in the core price index and remains significantly above the 2% target.

personal consumption expenditures price index (PCE Index) 2012 =100

Significantly, the price of core goods appears to have stabilized in the latter half of 2022, indicating a leveling off in inflation. Conversely, inflation in food prices has noticeably decelerated during the same period. However, the rate of increase in the price of core services excluding housing shows no signs of slowing down, demonstrating sustained inflationary pressure. Moreover, housing services experienced a substantial acceleration in inflation throughout 2022. It is important to note that housing prices typically exhibit a lag compared to other prices, suggesting that the recent observations may reflect this lag rather than a current trend.

Even if we consider the lag, core services excluding housing—comprising a significant 50% of consumption expenditures—continue to display a steady upward trajectory, making them a substantial contributor to overall inflation.

Read more: Is the Cost of Capital Expenditures Becoming Unaffordable?

Inflation Is Widespread

Analyzing Inflation by Product Categories

To gain deeper insights into inflation trends across specific product categories, we can examine their annualized price changes and expenditure shares during different periods. The next figure provides an estimation of how inflation is distributed across these categories, with annualized price changes plotted on the horizontal axes and the corresponding expenditure shares on the vertical axes. Two distinct periods are considered: the pre-pandemic period spanning from 2016 to 2019, and the COVID-19 period encompassing March 2020 to March 2023.

By focusing on the COVID-19 period as a whole, we can eliminate the influence of temporary price surges and obtain a clearer overall perspective of inflation dynamics. This analysis allows for a more nuanced understanding of how different product categories contribute to overall inflation during the specified periods.

Share of personal consumption expenditures (PCE) Inflation
Share of personal consumption expenditures (PCE)

Shifting Distribution of Inflation and its Implications

The COVID-19 pandemic has brought about a notable shift in the distribution of inflation, with a greater proportion of consumption expenditures allocated towards products experiencing higher inflation rates compared to the pre-pandemic years. This indicates that the current high inflation episode is not confined to a few outliers but rather a widespread phenomenon affecting various product categories.

Furthermore, the distribution of inflation across product categories unveils significant differences between the pre-pandemic and COVID-19 periods. In the years 2016 to 2019, around 18% of consumption expenditures were directed toward products with negative inflation. However, in the COVID-19 period, this proportion drastically decreased to less than 1%. Conversely, the share of expenditures on products with an annual inflation rate exceeding 5% was merely 5% during the pre-pandemic period but surged to over 40% amid the COVID-19 period. These notable shifts in expenditure patterns shed light on the nature of the current high-inflation environment.


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