The Big Idea

A sticky inflation situation

| March 22, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

When it comes to inflation, “sticky” has two meanings.  The academic definition refers to prices that tend to change infrequently.  A more popular meaning in the inflation debate is that the rate of increase in prices is high and coming down only slowly.  For the Atlanta Fed’s Sticky-Price CPI gauge, both definitions apply currently.

The Sticky-Price CPI

The Atlanta Fed has crafted an alternative gauge of underlying inflation called the Sticky-Price CPI.  I have written about it in the past, but the pickup in headline and core inflation indicators in January and February makes this a good time to revisit the metric.

Economists have looked at the frequency at which different prices change.  One academic research effort found that of the 350 detailed categories used in the CPI, the median frequency of price changes was once every 4.3 months.  Fed researchers built on this paper by dividing the 45 major components of the CPI into the 21 that change more frequently than 4.3 months and the 24 that change less frequently.

The former grouping was labeled the “Flexible-Price CPI” and includes such categories as most of the food and energy sectors, used vehicle prices, hotel rates and several apparel components.  In theory, the Flexible-Price CPI should be quite sensitive to the state of the economy. That is, prices for these items closely track frequent shifts in supply and demand.

The latter group was labeled the “Sticky-Price CPI” and includes categories like rent, OER, medical care services, motor vehicle insurance, household furnishings and operations and recreation.  In theory, because firms selling “sticky” products and services move their prices infrequently, in many cases because the adjustment costs of altering prices may be high, the sticky price index tends to be more forward-looking.  That is, firms will want their prices to account for inflation over the period between the infrequent price changes. The Sticky-Price CPI consequently can be thought of as offering particular insight into inflation expectations and the underlying rate of inflation.

I like the Sticky-Price CPI for another reason.  As I have laid out on a monthly basis, I believe that it is helpful to strip the noisiest categories out of the CPI, because big one-off swings in these line items can distort headline and core changes in any given month.  In contrast, the sticky-price components typically exhibit less random noise and offer a reasonably accurate view of the underlying trend.  In this sense, the Sticky-Price CPI approximates my Ex-Fearsome-Five core CPI measure.

Flexible prices

The Atlanta Fed Flexible-Price CPI has cooled dramatically over the past year or two.  The gauge has moved from a high of nearly 20% into slightly negative territory (Exhibit 1).

Exhibit 1: Atlanta Fed Flexible-Price CPI

Note: The data show the 12-month change in the Flexible-Price CPI.
Source: Atlanta Fed.

This descent reflects the unwinding of supply chain snags for a variety of goods, most notably used motor vehicles.  It appears that the disinflation more or less stabilized as of last summer, as the year-over-year change has been fluctuating near zero since August.

Sticky prices

In contrast to flexible prices, the Sticky-Price CPI has decelerated but remains elevated. The year-over-year advance has declined from its peak but is still running above 4%, far too high for the Fed to take comfort (Exhibit 2).  For reference, this gauge resided in a 2% to 2.5% range in the years before the pandemic.

Exhibit 2: Atlanta Fed Sticky-Price CPI

Source: Atlanta Fed.

One might take comfort from the Sticky-Price CPI by noting that the year-over-year advance has been steadily coming down, a trend that continued in February.  However, a more granular examination of the Sticky-Price CPI points to trouble. Look at the 3-month annualized percent change (Exhibit 3).  For this more sensitive way of slicing the data, the rate of inflation bottomed out at 3.6% (still too high) in July but has been accelerating since then, reaching 5.0% in February, the highest reading since April.

Exhibit 3: Atlanta Fed Sticky-Price CPIa closer look

Source: Atlanta Fed.

This divergence between the year-over-year advance and the higher frequency changes mirrors what we are seeing in the core figures.  For the core CPI, the year-over-year increase has continued to inch down, but the 3-month annualized rise bottomed out in August at 2.6% and has since rebounded to above 4%.  For the core PCE deflator, the 3-month annualized advance fell to as low as 1.6% in August and again in December but surged to 2.6% in January and may speed up further to over 3½% in February.

Too soon to declare victory

Chair Powell on Wednesday declared that the FOMC is hopeful that the pickup in core inflation in early 2024 will prove to be a bump in the road but is keeping an open mind. The Atlanta Fed Sticky-Price CPI, more than the traditional core indices, suggests that the degree of cooling seen late last year probably exaggerated the underlying reality of the broad inflation picture and that, even if the early-2024 results are somewhat inflated, the rate of underlying inflation is still far too high for the Fed to consider declaring victory any time soon.

Stephen Stanley
stephen.stanley@santander.us
1 (203) 428-2556

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

Important disclaimers for clients in the EU and UK

This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.

This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.

This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.

This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.

The Library

Search Articles