December thirtieth, two thousand twenty-four
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resistance to change and hence greater dependability for the results shown in the past.
Catch-up inflation in macroeconomic data: consumer prices and input costs
Actual wage growth is not as concerning as the headline data suggest.
Historically, Union wage growth is usually a lagging indicator of labor market conditions, because union contracts are adjusted less frequently, and therefore reflects the inflation peak for longer.As can be seen in the chart at the bottom right, over the past three years, Wage growth for union workers consistently lagged that of nonunion workers until it began to catch up in recent quarters.
Chart: A lag between union and nonunion wages
With indicators of labor-market tightness continuing to decline or remaining stable, some wage growth reflects delayed catch-up compensation, rather than a renewed tightening of the labor market.Lagged union wage pressures temporarily push up prices in labor-intensive categories, delaying the return of core PCE inflation to target.
Many stories about price inflation can be explained using similar logic:
The parts of current inflation with the largest increases appear overheated, but are actually the result of lagged catch-up effects rather than renewed labor-market tightness or accelerating demand. This phenomenon is most evident in housing, health care, auto insurance and other regulated prices.
In these areas, market prices or input costs rose sharply over the past few years but their rate of increase has slowed recently, while consumer prices are now in a catch-up phase As the gap between prices and costs gradually narrows, price increases will gradually slow.
Take housing as an example: official shelter inflation measures will catch up with higher market prices:
Chart: Official shelter inflation measures lag market-price measures
The chart on the left shows that since the first quarter of 2020, rents for new tenants have risen 24%, while the official shelter price measure has risen only 22%.Market prices—that is, rents paid by new tenants—tend to adjust faster than rents paid by existing tenants, while the official shelter inflation measure includes rents for both new and renewing tenants.
The latter generally adjusts more slowly because leases are renewed less frequently, landlords are reluctant to lose tenants by raising rents too quickly, and regulations sometimes limit rent increases.
It takes time for the data to reflect the gradual adjustment in the rental market and the fading of catch-up effects.
In health care, consumer prices also catch up with higher input costs.Health care prices tend to adjust slowly, mainly because contracts have long terms, especially in the hospital sector.Long contract terms, especially in the hospital sector.
The chart below on the left shows that since the first quarter of 2020, health care service costs have risen 15%, reflecting higher supply and labor costs (for example, hospital wages rose 13% during 2021-2022), while consumer prices have risen only 11%:
Chart: Contract terms in health care cause consumer prices to catch up with input costs later
Similarly, in In auto insurance, consumer prices are also catching up with higher input costs.
The chart below on the left shows that since the first quarter of 2020, auto insurance costs have risen 51%, while consumer prices have risen 43%:
Chart: Auto insurance prices also need to be coordinated with regulators, leading to catch-up inflation
These cost increases have a long lag because auto insurers need to negotiate price adjustments with state regulators based on recent costs and profitability.
As a result, when analyzing macro inflation, the components involving catch-up inflation can be excluded when assessing forward-looking trends and turning points when the prices of the parts of the inflation basket not significantly affected by lagged catch-up effects slow to the high of the previous cycle’s range, the disinflation trend can be expected to stabilize,
For now, as prices catch up, catch-up inflation is nearing its end.
Chart: Catch-up inflation naturally ends as prices catch up
Officially measured rents have now fully caught up with market prices, and owners’ equivalent rent has nearly caught up with market rents for new tenants, continuing to converge toward the low growth rates of the past two years. The catch-up in government-regulated categories such as auto insurance also appears to be nearing its end.
Chart: Wage growth has tended to fall below 4%, and catch-up wage growth among union members has ended; they often sign multiyear contracts, and those contracts are now approaching expiration.
Further reading:
GS：Continued Catch-Up Means the Latest Wage and Inflation Readings Are Lagging Indicators
GS：Shelter Inflation: A Longer Lag for OER
GS：Car Insurance: Another Case of Catch-Up Inflation
GS：10 Questions for 2025
2024.12.30
Why does auto insurance contribute much less to PCE than to CPI?
Auto insurance contributes much less to PCE than to CPI There are two main reasons. First, the PCE index captures changes in insurance premiums after deducting “normal losses” paid to consumers, whereas the CPI index captures premiums alone.Therefore, auto insurance accounts for about 3.7% of core CPI, but only 0.6% of core PCE.
Auto insurance contributes much less to PCE than to CPI for two main reasons.
First, The PCE index reflects changes in insurance premiums after deducting the “normal losses” paid to consumers, while the CPI index reflects premiums alone Therefore, Auto insurance accounts for about 3.7% of core CPI, but only 0.6% of core PCE.
Example:Suppose a consumer pays 1000 dollars a year for auto insurance, and the insurer pays 600 dollars a year to consumers in claims:
1) CPI would count the full 1000 dollars as insurance costs.
2) PCE would count only 400 dollars (the premium minus claims), because the remaining 600 dollars are compensation paid by the insurer under the contract, not the cost of the insurance service.
PCE focuses on the net cost of insurance services by deducting “normal losses,” making it a more precise measure of insurance prices. CPI is more direct, reflecting the full premiums consumers pay, and therefore gives a clearer picture of perceived spending pressure.This difference means that auto insurance has different weights and price-change patterns in PCE and CPI.
Second, the PCE index measures auto insurance prices using PPI, while CPI uses insurance premium data directly.
In PPI, prices are reset only when sampled policies expire and are renewed, while CPI rotates pricing for half of its sample every two months. The measurement differences between PPI and CPI are mainly due to differences in sample-update mechanisms and frequency.PPI uses dynamic sample adjustments and renewal pricing, resulting in a longer lag but better representing actual market revenue changes; CPI, in turn, Based on a fixed sample, it reflects price trends more promptly, but is less adaptable to changes in market structure.
[Impact of the policy renewal mechanism]
1) PPI is repriced only when policies in the sample come up for renewal. This means price changes are reflected only after a renewal occurs. If the renewal cycle is long, such as a year or longer, price adjustments will be delayed.
2) By contrast, CPI updates prices by resampling some policies every two months, so price changes are captured more frequently and promptly.
3) Why occasional jumps occur: When a group of policies in the sample expires and is renewed at the same time, price adjustments are reflected all at once in PPI, creating a clear “jump” in the price curve. By contrast, more frequent price updates make the curve for CPI smoother, with fewer such jumps.
Therefore, PPI’s readings sometimes show jumps as policies are renewed and may lag behind CPI. In addition, PPI uses a “targeted replacement” adjustment, periodically updating the policies in its sample so they better represent the company’s revenue, while CPI has priced the same set of policies since 2004. As insurance costs have risen over the past few years, consumers may have changed the types of policies they buy and their coverage, which has also led to differences between the measurements of CPI and PPI.
Further reading:
GS：Car Insurance: Another Case of Catch-Up Inflation
Market Notes 240729: PCE is more relevant to the Fed’s inflation target and monetary policy path PCE
2024.12.30
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