What consumer items have contributed the most to inflation in the last 3 years?

As U.S. inflation rates rose consistently from Feb 2021 to a peak of 9.1% in Jun 2022, and then slowly falling to their current 3.3% as of May 2024, how has the narrative of what lies behind these inflation rates changed over this period? In this post, my co-author Erik Vasilauskas and I take a look at which consumer expenditure items have had the greatest contributions to each of four periods of price change, the 12-months ending in December of each year from 2021 to 2023, and the most-recent 12-month period ending in May 2024.

From 2020-2022, the inflation conversation centered on used cars and trucks, food, and the price of gas at the pump. 

Prices for used cars and trucks increased a whopping 37.3% between December 2020 to December 2021, reflecting a shifting of demand away from new cars that were severely supply-constrained owing to a lack of semi-conductor chips, which were significantly affected by COVID-19 related global production shutdowns. A natural question is how much did these rapid rates of price change actually contribute to the 7.0% inflation rate in December 2021? The answer depends critically on the relative weight or what the Bureau of Labor Statistics (BLS) calls the relative importance of each expenditure category in the overall basket of goods and services being measured. BLS publishes revised relative importances each month and in December 2021, used cars and trucks had a relative importance of 4.1% out of total expenditures in the CPI basket. This 37.3% inflation rate in used cars and trucks accounted for 14.6% of the overall inflation rate from December 2020 to December 2021 (see table 1, and also, see table 2 for the percentage contributions out of ‘core’ inflation -- all items less food and energy). The subsequent easing of supply constraints for semi-conductor chips has led to declining inflation rates and contributions of used cars and trucks to overall inflation rates in 2022 and beyond.

As the U.S. started emerging out of the pandemic, the demand for gasoline rose significantly in 2021. This trend along with rising crude oil prices, responding to geopolitical concerns, supply limitations imposed by OPEC, and reduced refinery production in the US, translated into significantly higher gas prices at the pump in 2021. Overall, gasoline prices accounted for nearly 20% of overall inflation for the 12-months ending in December 2021. These price trends continued into the first half of 2022, exacerbated by Russia’s invasion of Ukraine in February of that year. The second half of 2022 saw crude oil supplies increasing, US refinery production increasing, and a decline in consumer demand (owing to the higher gas prices earlier in the year), leading to declining prices from June to December. As a result, gasoline prices contributed -0.9% to overall inflation for the 12 months ending in Dec 2022.

Rising food prices resulted from supply interruptions due to COVID-19 – including plant shutdowns and transportation disruptions due to worker sickness, shifts in consumer demand away from restaurants to grocery stores, and global supply chain issues for agricultural products related to the conflict in Ukraine. The 10.4 percent inflation in food prices in 2022 accounted for over 21% of inflation for the 12-month period ending in December of that year.

By contrast, an expenditure item can have a very significant contribution to overall inflation even when price increases are more moderate, but the relative importance of the index is high.  The shelter index, which includes both rent of primary residence, and owners’ equivalent rent of residence, had a weight that reflected 34.4 percent of consumer spending on all items as of December 2022. At 7.5 percent for the twelve months ending in December 2022, the shelter index moderately outpaced the 6.5% inflation in the all-items index, but its increase accounted for over 38 percent of the change in overall inflation. The outsized contribution of this important expenditure item became more apparent as inflation was easing throughout 2023 and into 2024, with contributions of 62.3% in 2023 and 57.5% as of May 2024.

In addition to shelter, another category that has taken center stage in the inflation conversation recently is motor vehicle insurance, with inflation rates of 14.2% in December 2022, 20.3% in December 2023, and 20.3% in May 2024. Our review of the business literature suggests a number of factors that have contributed to the dramatic rise in motor vehicle insurance rates such as the much greater use of electronic monitoring devices around vehicle-body frames that makes even minor accidents more expensive to repair, the greater frequency and severity of auto-accidents since the pandemic (National Highway Traffic Safety Administration 2022), and the rising costs of insurance that have accompanied the rising costs of new vehicles, among others. So how have these higher premium rates contributed to overall inflation? As of May 2024, this one expenditure item, with a relative importance of 2.9% in April 2024, contributed 15.8% to the overall 12-month inflation rate.