Despite overall inflation rates dropping, core sticky inflation remains high, impacting essential items like housing, healthcare, and education. This discrepancy creates confusion for consumers, uneven economic impact, and monetary policy challenges, emphasizing the complexities of managing inflation.
In recent months, overall inflation rates have been dropping, a testament — some may argue — to the effectiveness of the Federal Reserve’s efforts to mitigate price increases.
However, core sticky inflation remains stubbornly high, leaving many consumers wondering what this means for their day-to-day lives.
To better understand the impact of these divergent inflation rates, let’s first explore what core sticky inflation is and then examine the implications of its persistently high levels.
What is core sticky inflation?
Core sticky inflation refers to the price changes of goods and services that don’t adjust quickly to shifts in the economy. These include essential items such as housing, healthcare, and education. As opposed to flexible prices, which react rapidly to market changes, sticky prices can take longer to adjust, making them more resistant to economic fluctuations.
To illustrate this concept, think of sticky prices as a jar of honey – even when you tilt the jar, the honey flows slowly and remains largely stuck to the sides. In contrast, flexible prices are like water in a glass, quickly responding to any movement or change in direction.
The persistence of high core sticky inflation
Despite the overall inflation rate dropping to 5.0%, the core sticky CPI remains near its 40-year record high of 6.6%. This means that while the prices of some goods and services are decreasing, the costs of essentials like housing, healthcare, and education continue to rise at a worrying pace.
Why does this matter?
This discrepancy between overall inflation and core sticky inflation has several important implications.
Confusion for consumers
The drop in overall inflation may give the impression that household finances are improving. However, the high core sticky CPI means the costs of essentials are still rising, creating uncertainty and making it difficult for consumers to plan and budget effectively.
Uneven economic impact
While some sectors may benefit from the slowdown in overall inflation, others, particularly those dealing with essential goods and services, face ongoing pressure from rising prices. This uneven impact can lead to disparities in economic recovery and growth.
Monetary policy challenges
The difference between overall inflation and core sticky inflation complicates the central bank’s ability to determine the best course of action. If they focus solely on overall inflation, they risk overlooking the ongoing price pressures in essential goods and services, which can have lasting effects on consumers’ well-being.
The drop in overall inflation is a promising sign for the economy, but the persistently high core sticky inflation rate underscores the ongoing financial strain faced by consumers. This contrast highlights the complexities of managing inflation and the challenges faced by both consumers and policymakers in navigating today’s economic landscape. As we move forward, it is crucial for both individuals and decision-makers to consider the implications of these divergent inflation rates and work towards a more balanced and equitable economic recovery.
- Core sticky inflation focuses on essential items with slow-to-adjust prices.
- Overall inflation rates are dropping, but core sticky inflation remains high.
- High core sticky inflation creates confusion for consumers and challenges in budgeting.
- Uneven economic impact results from varying inflation rates across sectors.
- Monetary policy challenges arise as central banks navigate complex inflation dynamics.
- A balanced and equitable economic recovery requires addressing divergent inflation rates.
View Article Sources
- Consumer Price Index 1980 – 2022 – Federal Reserve
- CPI up to September 2022 – BLS
- Consumer Prices by Category – BLS
- Core sticky inflation – Federal Reserve
- Contributions to CPI – OECD
- Real disposable personal income per capita – Federal Reserve
- S&P Case-Shiller U.S. National Home Price Index – Federal Reserve
- U.S. Households Face $5,200 Inflation Tax – Bloomberg
- Consumer Price Index News Release – BLS
- National Rent Trend – Realtor
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.