U.S. Inflation Rate: Overview and Breakdown

U.S. Inflation Rate

GuruFocus uses "Consumer Price Index for All Urban Consumers: All Items in U.S. City Average" as the CPI data to calculate U.S. inflation rate. In February 2023, the annual inflation rate in the U.S. was 6.04% before seasonal adjustment over the last 12 months, slightly dropping from 6.41% in January 2023. Still, it was the lowest reading since September 2021.

Statistically, we can see the current (February 2023) annual inflation rate of 6.04% in the U.S. is higher than the latest 20-year average of 2.51%, plus one standard deviation of 1.93%. Over the last 20 years, the annual U.S. inflation rate peaked at 9.06% in June 2022, which indicates the lowest purchasing power of the U.S. dollar. The lowest inflation rate of -2.1% occurred in July 2009, which indicates the highest purchasing power.

U.S. Core Inflation Rate

GuruFocus uses "Consumer Price Index for All Urban Consumers: All Items Less Food and Energy" as the core CPI data to calculate U.S. core inflation rate. In February 2023, the annual core inflation rate in the U.S. was 5.54% before seasonal adjustment over the last 12 months, slightly dropping from 5.58% in January 2023. Still, it was the lowest core inflation reading since December 2021.

Statistically, we can see the current (February 2023) annual core inflation rate of 5.54% in the U.S. is higher than the latest 20-year average of 2.24%, plus one standard deviation of 1.14%. Over the last 20 years, the annual U.S. core inflation rate peaked at 6.63% in September 2022, which indicates the lowest purchasing power of the U.S. dollar. The lowest core inflation rate of 0.61% occurred in October 2010, which indicates the highest purchasing power.

From the two U.S. inflation charts, we can see the inflation rate is positive for most of the year, which means the overall price of goods and services has increased over time. This also indicates a loss of purchasing power, i.e. a unit of money buys fewer goods and services. In economics, deflation is a decline in the general price level of goods and services that occurs when the inflation rate falls below 0%.

Although high inflation hurts an economy, deflation, or falling prices, is also undesirable. When prices fall, consumers delay purchases in anticipation of lower prices in the future, which means less economic activity, less income for producers and less economic growth for the economy. The chart shows that deflation has been associated with recessions in the U.S., and that the most severe deflation occurred immediately after the 2008 financial crisis. Most economists now agree that low, stable and, most importantly, predictable inflation is good for the economy.

Major Contributors to U.S. Inflation

A closer look at inflation by component provides a more detailed picture of inflation. The chart below shows the contribution of each component of the CPI to inflation. Each component's contribution to total annual inflation depends on its weight in the consumption basket and its own inflation rate. The weight is an estimate of how consumers would allocate their spending as prices change over time and is expressed as a percentage of all items within a sector.

Based on the eight major groups of expenditures in the CPI, the U.S. inflation rate can be broken down into eight major components. Among all the components, the largest contributor to the annual inflation rate in the U.S. is Housing, which accounts for about 57.78% of total inflation as of February 2023, while the smallest contributor is Education and Communication, which accounts for only 0.99% of the total. Apart from these, the contribution of each component in descending order is listed as Food and Beverages (21.69%), Transportation (7.62%), Recreation (4.3%), Medical Care (3.31%), Other Goods and Services (2.81%), and Apparel (1.49%).

Table: Percent changes in CPI for All Urban Consumers (CPI-U): U.S. city average (Unadjusted)

Overall, comparing with the latest (February 2023) annual inflation rate in the U.S. with the previous month-end (January 2023) annual inflation rate, a slowdown was seen in Food and Beverages prices (9.20% vs 9.87%), Housing prices (8.21% vs 8.23%), Transportation prices (2.59% vs 3.80%), Medical Care prices (2.34% vs 3.06%), and Other Goods and Services prices (6.08% vs 6.23%). In contrast, there were increases in the cost of Apparel (3.26% vs 3.06%), Recreation (4.96% vs 4.80%), and Education and Communication (1.04% vs 1.01%).

Food and Beverages

In February 2023, the Food and Beverages index rose 0.42% over the month. Additionally, the index for Food and Beverages increased 9.20% over the past 12 months.

Housing

In February 2023, the Housing index rose 0.54% over the month. Additionally, the index for Housing increased 8.21% over the past 12 months.

Apparel

In February 2023, the Apparel index rose 3.26% over the month. Additionally, the index for Apparel increased 3.26% over the past 12 months.

Transportation

In February 2023, the Transportation index rose 0.71% over the month. Additionally, the index for Transportation increased 2.59% over the past 12 months.

Medical Care

In February 2023, the Medical Care index fell 0.35% over the month. Additionally, the index for Medical Care increased 2.34% over the past 12 months.

Recreation

In February 2023, the Recreation index rose 1.08% over the month. Additionally, the index for Recreation increased 4.96% over the past 12 months.

Education and Communication

In February 2023, the Education and Communication index rose 0.05% over the month. Additionally, the index for Education and Communication increased 1.04% over the past 12 months.

Other Goods and Services

In February 2023, the Other Goods and Services index rose 0.91% over the month. Additionally, the index for Other Goods and Services increased 6.08% over the past 12 months.