Long Term Perspective

The GDP price index is the broadest measure of price inflation faced by consumers and producers, yet it gets less attention than the CPI or the employment cost index (ECI). In recent years on average, ECI inflation exceeded the other two and CPI inflation outstripped GDP price inflation. GDP has some components with typically high productivity such as producers’ durable equipment, software, and nonresidential construction.  In recent quarters, weak residential and nonresidential investment has kept the GDP price index soft.  During early 2009, energy turned the headline CPI negative but that reversed in the final quarter of 2009 on a year-ago basis and accelerated in early 2010 on a year ago basis, and remained high into mid-2011.  Weaker energy costs pulled inflation down in 2012.

Short Term Perspective

The employment cost index accelerated over 2006 and remained somewhat elevated through 2007, reflecting a still tight labor market. However, the ECI remained at a moderate quarterly pace during most of 2008 due to a softer labor market and employers raising employee deductibles for medical care coverage.  The ECI slowed dramatically during 2009 but firmed in early 2010 and continued a slow uptrend into early 2011.  But in the second quarter of 2012, the ECI posted at an annualized 2.1 percent, up from 1.7 percent in the first.

The CPI has whipsawed the last two years on swings in oil prices.  In the third quarter of 2012, the headline CPI jumped to an annualized 2.3 percent after rising 0.8 percent the prior quarter.  The GDP price index showed economy-wide inflation surging to 2.8 percent, compared to 1.6 percent in the second quarter.  GDP includes sluggish components of residential and nonresidential structures not found in the CPI or ECI.  But in the third quarter, higher gasoline prices (seen in nondurables PCEs) boosted the GDP price index.