CPI-U, U.S. Services, 12-month percentage increase
February’s inflation rate for services rose 0.6%, just a touch below January’s increase of 0.7% with the two months’ combined increase moving towards levels last seen in 2008 before the recession saw a slowdown in costs.
For the 12 months ending in February 2022, the CPI-U Services index rose 4.8%, the highest 12-month increase for the index since 1991. For the Atlanta area, the services index rose 7.8%.
Unlike food and energy prices that tend to be more volatile, related to supply chain issues, and are more subject to global influences; costs for services are more influenced by domestic considerations.
Energy prices may vary depending on global supply and demand considerations for items like gasoline and natural gas, food prices may vary depending on global supply and demand considerations for a host of products such as wheat, but costs for services are mostly dependent on demand and supply within the U.S. economy.
As the New York Federal Reserve pointed out back in 2013, “While core services inflation depends on long-run inflation expectations and the degree of slack in the labor market, core goods inflation depends on short-run inflation expectations and import prices.” (https://www.newyorkfed.org/research/current_issues/ci19-7.html)
What are services?
In the most basic approach, the Consumer Price Index can be broken down into goods and services. BLS defines services as including shelter, transportation services, medical care services, energy services, water and sewerage, maintenance, trash and garbage collection, household operations, education, and other services.
By reviewing this list, one can see that services tend to be located within the borders of the U.S., and thus less subject to fluctuations in the global economy. At the same time, prices for services tend to move in a more even fashion with less volatility than the overall index.
As a result, once prices for services move up, it makes it that much harder to bring down inflation as services inflation tends to embed in the economy. If the Federal Reserve’s policy is to maintain inflation at or about the 2% level, then inflation for services will need to drop by more than half to meet that goal.
