Inflation is still a basket case


Please see below the latest ‘Chart of the Week’ from State Street Global Markets.

Michael Metcalfe, head of Macro Strategy, on why the uneven recovery in consumption means inflation is still higher than reported.

“Spending may be recovering sharply, but the uneven nature of that recovery means the basket of goods that consumers are buying is still significantly altered, thus distorting measured inflation. Consumers continue to spend less than normal on items such as entertainment, recreation and transport. As a result of this, inflation indices are putting too much weight on the prices of these goods based on past consumption patterns.

“Whilst official headline inflation posted the first signs of a bounce in June to 0.6 percent, Alberto Cavallo, Edgerley Family Associate Professor at Harvard Business School, academic partner of State Street Associates and Co-Founder of PriceStats*, estimates that the actual inflation rate adjusting for the new COVID consumption basket is already much higher, at 1.4 percent. Remarkably this is only two-tenths below where inflation was this time last year in the midst of a very different economic environment. View the data here.“

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Spending patterns and inflation 

Source: State Street Global Markets, Bloomberg, Affinity Solutions

*About State Street PriceStats®

PriceStats is a provider of high-frequency global inflation indices and purchasing power parities that offer insights into key macroeconomic variables. The indices are generated using software that scans the underlying code on public websites to capture the full array of products sold by online retailers, including food, beverages, electronics, apparel, furniture, household products, prescription drugs, and over-the-counter medicines. The technology monitors price fluctuations on roughly five million items sold by hundreds of online retailers in more than 70 countries. The PriceStats methodology is grounded in the extensive body of research of Alberto Cavallo and Roberto Rigobon and their Billion Prices Project at MIT. Cavallo and Rigobon have leveraged this research and their expertise in monetary economics to develop the PriceStats indices.

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