US consumer prices rose 3.7% in the year to September, up from 3.4% in August and a touch above expectations of 3.6%, according to Wednesday’s Consumer Price Index report. Prices climbed 0.6% on the month, in line with forecasts. Core inflation, which strips out volatile food and energy prices, rose to 2.6% from 2.4%, slightly above the 2.5% expected, with a monthly gain of around 0.3%.
On the surface, that is not the direction the Federal Reserve wants. But Bloomberg Economics read the report as less troubling than the headline numbers suggest. Anna Wong, its chief US economist, highlighted a measure of how widespread inflation is, rather than how fast it is running on average, and noted that it fell in September.
It’s an interesting lens on the data, and one that may carry more weight than usual. Wong said the gauge is built in a similar way to an inflation breadth measure based on PCE, the Fed’s preferred inflation index, which she linked to Fed chair Kevin Warsh.
What inflation “diffusion” means
The Consumer Price Index (CPI) is built from hundreds of separate price categories, from rent and car insurance to eggs and airfares. The headline inflation rate is effectively a weighted average of all of them.
A diffusion, or breadth, measure takes a different approach. Instead of averaging, it counts. Bloomberg Economics’ version asks what share of CPI components are rising faster than 3% a year.
It tracks that share over two windows. One uses price changes over the past 12 months. The other uses the past six months, annualised, meaning the six-month change is scaled up to a yearly rate. The six-month version reacts faster, so it often shows a turn first.
What the chart shows
The history gives the latest reading its context. During the 2022 inflation surge, roughly 80% of CPI components were rising faster than 3%: price pressure was almost everywhere. Through much of the 2010s, when inflation was subdued, the share sat closer to 20%.
On the six-month measure, the share has now dropped to around 40%, down from roughly 55% earlier this year. The 12-month measure has eased by less.
Why breadth matters
An average can be pulled up sharply by a handful of large items, such as a jump in energy or insurance costs. That is a very different situation from one where most prices are rising quickly.
If fewer categories are running hot, inflation looks narrower and less entrenched. That is generally more comforting for the Fed, because narrow price shocks tend to fade, while broad-based inflation is harder to bring down.
The approach fits with how Warsh has talked about inflation. At his confirmation hearing he called PCE an imprecise tool and favoured trimmed-mean and median measures, which strip out the most extreme price moves to get at the underlying trend.
What could change the picture
Breadth tells you how widespread price rises are, not how large they are. A few big price increases in heavily weighted categories can still keep headline inflation high even as the share of hot components falls.
One month’s drop in a fast-moving six-month measure is also not a trend. If the share rebounds in the next few reports, the reassurance would fade quickly.
What to watch next
Watch whether the six-month breadth measure keeps falling in the next CPI report, and whether the 12-month line follows it lower. The September PCE data will show whether the Fed’s preferred index tells the same story. And listen to how Warsh and other Fed officials describe inflation: language about price pressures becoming less broad would suggest this kind of measure is shaping their thinking.
The practical takeaway is that when the headline CPI number looks uncomfortable, it’s worth asking how many prices are actually driving it.
This article was written by Eamonn Sheridan at investinglive.com.
