The Week Ahead: Fast-cooling inflation is not a slam dunk

For financial nerds, the Big Three are not LeBron James, Dwayne Wade and Chris Bosh of the NBA’s Miami Heat circa 2012. The Big Three of inflation are not nearly as flashy, but they are the stars dominating the field.

Rent, home ownership costs and eating out are what the Federal Reserve Bank of Dallas refer to as the Big Three of inflation. The regional bank calls these prices the “largest and least-volatile components of core services.”

In the middle of oil country, energy prices do not reign supreme as an inflation gauge.

Much is made of core inflation — inflation minus food and energy — with each economic report. The next read on prices comes Friday in the week ahead. That’s when the Federal Reserve’s preferred inflation measurement — the personal consumption expenditures index — will be released.

The Big Three are considered services for the purpose of measuring price trends.

Focusing on core services instead of goods can be an important barometer of longer-term inflationary trends. After all, about 70 percent of the American economy is concentrated in services and usually the largest cost in any household budget is the house (or apartment or condominium).

Goods really fueled inflation in the first year and a half of the pandemic. Stimulus payments and low interest rates coupled with people staying home and shopping online collided with the supply chain crunch, resulting in skyrocketing price trends for items such as dryers and vehicles.

As the supply chain gets straightened out and energy prices come down (yes, food inflation remains a very real challenge), service inflation can be much stickier. The competition for homes has driven up housing costs, including renting, though higher mortgage rates as a result of the Fed sharply raising rate are likely to sideline some home buyers. Food prices coupled with a tight job market have helped drive up menu prices at restaurants.

The prices of services lagged and didn’t accelerate at the same rate as goods, and they haven’t cooled off like the inflation rate for some goods either. This is one reason why the Dallas Fed’s Big Three are worth focusing on for investors.

Tom Hudson is a financial journalist and chief content officer at WAMU public radio in Washington, D.C. Follow him on Twitter @HudsonsView.