Last we visited on the subject of U.S. inflation (November, 2015) we wrote,
"Using those simplistic numbers suggests that U.S. inflation as measured by the [headline] CPI could rise to an annual rate of about 4% ..."
That possibility is now increasingly likely given recent rise in U.S. inflation. This view is reaffirmed by recent data. If an error exists in this projection, it is to underestimate potential for inflation in U.S. to rise.
Analyzing the state of U.S. inflation begins with the median CPI produced monthly by Federal Reserve Bank of Cleveland. What is the median CPI? To calculate the headline CPI for any particular month the rate of change is calculated for each of the components of the CPI such as energy, food, and housing. Headline CPI is then calculated by weighting each of those components to produce a weighted average. Median CPI is that rate of change for which half of the components had a higher rate of change and half had a lower rate of change. It divides a ranking of the component rates of inflaton in half. The median is less impacted by extreme changes in the prices for anycomponent which can in someways distort the weighted average CPI.
In top chart is plotted the year-to-year percentage change for the median CPI. Two observations are worthy of mention. These observations suggest that expectations of higher U.S. inflation are reasonable and likely to be correct. First, the latest observation exceeds the previous high. Second,in January the year-to-year percentage change rose to the highest level since 2009.