Narrowing inflation breadth offers Fed more comfort than headline CPI suggests

US consumer prices rose 3.7% in the year through September, accelerating from 3.4% in August and slightly above the 3.6% economists had forecast, the Labor Department's latest Consumer Price Index showed Wednesday. Month over month, prices gained 0.6%, matching expectations. Core CPI, which excludes food and energy, increased to 2.6% from 2.4%, a touch above the 2.5% consensus, with a monthly rise of about 0.3%.

At first glance, that is not the trajectory the Federal Reserve wants to see. But Bloomberg Economics viewed the data as less alarming than the top-line number indicates. Chief US economist Anna Wong pointed to a metric that tracks how widespread price increases are, rather than the average pace, and noted that this measure declined in September.

That perspective offers an unusual lens on the figures, and one that may be especially relevant now. Wong said the indicator is constructed similarly to an inflation breadth measure based on PCE, the Fed's preferred gauge, which she linked to Fed chair Kevin Warsh.

The meaning of inflation “diffusion”

The CPI is compiled from hundreds of distinct price categories, ranging from rent and car insurance to eggs and airfares. The headline rate is essentially a weighted average of all of them.

A diffusion or breadth measure takes a different approach. Instead of averaging, it counts. Bloomberg Economics' version calculates the share of CPI components rising faster than 3% per year.

It monitors that share across two time frames. One uses price changes over the past 12 months. The other uses the past six months, annualised — meaning the six-month change is scaled up to a yearly rate. The six-month version responds faster, so it often signals a turn first.

What the chart illustrates

The historical data gives the latest reading its context. During the inflation surge in 2022, roughly 80% of CPI components were rising faster than 3%: price pressure was nearly universal. Through most of the 2010s, when inflation was subdued, that share hovered around 20%.

On the six-month measure, the share has now fallen to about 40%, down from roughly 55% earlier this year. The 12-month measure has declined less sharply.

Why breadth is important

An average can be pulled up significantly by a few large items, such as a spike in energy or insurance costs. That is a very different situation from one where most prices are rising quickly.

If fewer categories are running hot, inflation looks narrower and less entrenched. That is generally more reassuring for the Fed, because narrow price shocks tend to fade, while broad-based inflation is harder to bring down.

The approach aligns with how Warsh has discussed inflation. At his confirmation hearing he called PCE an imprecise tool and favoured trimmed-mean and median measures, which strip out the most extreme price moves to reveal the underlying trend.

What could alter the picture

Breadth tells you how widespread price rises are, not how large they are. A few big price increases in heavily weighted categories can still keep headline inflation high even as the share of hot components falls.

One month's drop in a fast-moving six-month measure is also not a trend. If the share rebounds in the next few reports, the reassurance would fade quickly.

What to monitor next

Watch whether the six-month breadth measure keeps declining in the next CPI release, and whether the 12-month line follows it lower. The September PCE data will show whether the Fed's preferred index tells the same story. And listen to how Warsh and other Fed officials describe inflation: language about price pressures becoming less broad would suggest this kind of measure is shaping their thinking.

The practical takeaway is that when the headline CPI number looks uncomfortable, it is worth asking how many prices are actually driving it.