The graph shows that in spring of 2021 inflation started to rise. To a great extent this was due to base effects, that is, the price falls that occurred in 2020 as the Covid pandemic spread dropped out of the calculation of 12-month inflation. While this was expected, the rise in inflation in the autumn of 2021 took commentators by surprise.
That increase was due to a combination of rising prices for food and energy and for the non-shelter component of core inflation. However, the shelter component also started rising but so gradually that few commentators took notice.
Headline inflation peaked in June 2022. Subsequently, its marked decline was largely due to a moderation of food and energy prices. Over time, however, core inflation excluding shelter also started to decline.
The figure also shows the main problem the Fed has been facing: the gradual increase in the rate of increase of the cost of shelter. From August 2022 onwards, it alone was responsible for pushing inflation above the Fed’s 2% target.
To see more clearly the behaviour of these inflation components, it is useful to look at annualised inflation over three months, as is done in the figure below. It shows that core inflation excluding shelter rose sharply in the spring of 2021 and in early 2022 and that it has contributed about 1 percentage point to the overall inflation rate in recent months. It also shows that the rate of increase in food and energy prices has fluctuated around zero since August 2022 and that it was negative in March and April this year.