Why You Should Care About 'Sticky' Inflation

Prices in the U.S. are still rising fast. Inflation for June was recorded at 9.1 percent, but behind the headline number lie some deeper, worrying trends.

One is so-called "sticky" CPI, or inflation. Provided by the Federal Reserve Bank of Atlanta, this index looks at the cost of goods with prices that are slow to change due to the low frequency of their price adjustment. In other words, once those prices get high, it takes a long time for them to come down again.

Sticky inflation was at 8.2 percent for June 2022, compared to the previous year. That's the highest it has been for 31 years. It hit 8.3 percent in January 1991 (see chart below).

When prices across the board on food, energy and housing are all up, why should consumers care specifically about "sticky" inflation?

Firstly, because many of the items in the "sticky" category are important or even essential goods. For example, the list includes children's clothing, auto repair costs, motor insurance, medical care goods, public transportation, communication and rent. Others in the list are more discretionary, such as food away from home, alcoholic drinks and recreation.

Secondly, because sticky prices are slow to change, and they "incorporate expectations about future inflation," according to a research paper published by the Federal Reserve Bank of Cleveland in 2010. That means consumers and businesses start to normalize or expect those kinds of price increases, which can help inflation to become self-perpetuating.

What about the other, non-sticky inflation items? The grim reality is that according to the Atlanta Fed: "The flexible cut of the CPI—a weighted basket of items that change price relatively frequently—increased 41.5 percent (annualized) in June." This sounds alarmingly high, and it includes gasoline, which is up nearly 60 percent from June 2021.

The high rate of "sticky" inflation would suggest that it will be hard for the U.S. Federal Reserve to get price rises under control, even with large interest rate hikes, and it raises the possibility of a prolonged recession. Economists all expect the Fed to raise borrowing costs, and soon, though there are different degrees of concern.

Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, told Reuters: "[Inflation] is staggeringly high. It's higher than expected and shows that inflation is going quickly in the wrong direction. It really pushes the Fed even further into the corner they've been operating in. They need to raise rates quickly and they need to raise rates by large amounts."

Michael Pearce, a senior U.S. economist at Capital Economics, said: "With commodity prices falling sharply and wage growth moderating in recent months, the outlook for inflation does not look as bleak as it did a month ago. Accordingly, speculation about a 100 basis points hike this month looks to be misplaced."

Westfield San Francisco
The Westfield San Francisco Centre on April 13, 2022, in San Francisco, California. "Sticky" price inflation is surging, and now at 8.2 percent. Getty Images